STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of April 22, 2025
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Budget Workshop: FY 25-26 City of Hercules Annual Proposed Budget and Capital Improvement Plan RECOMMENDED ACTION:
No action is required at this time. It is advisable for the City Council to engage in discussion and provide guidance to staff concerning the proposed Fiscal Year (FY) 25-26 annual budget. This discussion should address the additional budget request, as detailed in Attachment 1, which outlines the significant changes and the economic implications of each adjustment.
EXECUTIVE SUMMARY:
The City operates under a fiscal operating budget, and this meeting initiates the development of the FY 25-26 Annual Budget. This report presents the proposed balances for the FY 25-26 Annual Budget, encompassing both one-time and ongoing investments, as well as strategies for achieving long-term financial stability. Our objectives are to meet the needs of the community while adhering to the City’s current and projected financial resources. The proposed budget reflects the community’s long-term vision, strategic plans, and priorities.
The first public hearing regarding the budget is scheduled for May 27, 2025. Subsequently, the City Council will consider the adoption of the proposed FY 25-26 Annual Budget after a second public hearing, tentatively planned for June 10, 2025.
To enhance public understanding of the budget education process, the City has produced an engaging video that thoroughly outlines the intricacies of financial planning and management. This valuable resource walks viewers through the essential steps involved in crafting the budget, providing clear explanations and insightful details. You can easily access this informative video on the City’s website by following this link: https://www.ci.hercules.ca.us/government/finance/budgets.
BACKGROUND:
On May 28, 2024, the City Council formally adopted the Hercules City Council Strategic Goals for 2024-2026. This important decision establishes a framework for the Council's priorities and outlines multi-year goals to enhance our community's well-being.
The goals are as follows:
Goal #1: Advance the development of the Hercules Hub, creating a dynamic center for community engagement and economic activity.
Goal #2: Strengthen the city's fiscal sustainability through prudent financial management, ensuring long-term economic viability.
Goal #3: Enhance transparency and communication within the community, fostering a culture of openness and collaboration between residents and city officials.
Goal #4: Continue investing in a skilled and dedicated team at City Hall to ensure effective governance and service delivery.
Goal #5: Strategically plan and fund major infrastructure projects to improve connectivity and enhance the quality of life for all citizens.
Goal #6: Develop a comprehensive land-use strategy that promotes responsible development while preserving the unique character of our neighborhoods.
Goal #7: Formulate a detailed economic development strategy to attract new businesses and stimulate local employment opportunities.
The City Manager's proposed annual budget is carefully aligned with this commitment to long-term financial stability. It includes comprehensive revenue estimates and expenditure appropriations across various funds, such as the General Fund, other restricted funds, sewer services, debt service, and internal service funds. This budget comprehensively addresses all aspects of City operations, including general functions, capital investments, and debt obligations.
Additionally, it presents detailed fund summaries and financial schedules that illustrate actual results from the previous year, alongside a comparative analysis of the proposed annual budget for Fiscal Year 25-26 against the prior year's budget. The following categories delineate the key assumptions that informed this budgeting process, providing a transparent roadmap for our strategic initiatives.
Salaries and Benefits
Labor represents the most substantial component of our overall expenses, constituting nearly 60% of total expenditures. This extensive category not only includes direct compensation, such as wages and salaries, but also encompasses a range of vital benefits, such as comprehensive health insurance, robust retirement plans, and various other associated labor costs. The following section delineates the key assumptions that have been carefully considered in estimating the financial implications of salaries and benefits:
Base Salary: The costs associated with personnel services incorporated a wage increase of 3%. This increase is contingent upon the results of ongoing labor negotiations with various employee groups.
Retirement Plans:
Normal Cost: The projected normal cost rates for the PERS Miscellaneous and Public Safety classifications have been determined through comprehensive actuarial valuation using data as of June 30, 2023, specific to the City's retirement plans conducted by CalPERS. This thorough analysis is essential for establishing the minimum required FY 25-26 contributions. The term "normal cost" refers to the annual amount, expressed as a percentage of payroll, necessary to fund the pension benefits accrued by current employees during the current fiscal year. Additionally, the accompanying table provides an overview of the increases in contribution rates, facilitating a clear comparison to the previous year's budget. This information highlights the financial adjustments necessary to maintain the sustainability and integrity of our retirement systems, which is critical for policymakers and stakeholders engaged in fiscal planning and management.
Unfunded Actuarial Liability: The projected contribution amounts related to the unfunded actuarial liability for the PERS Miscellaneous and Public Safety classifications have been determined through a comprehensive actuarial valuation using data as of June 30, 2023, specifically for the City’s retirement plans by CalPERS. This detailed analysis is critical for establishing the minimum required contributions for the FY 25-26.
The unfunded actuarial liability (UAAL) reflects the disparity between the total cost of promised pension benefits and the assets available to fulfill those obligations. Essentially, it indicates a shortfall in the pension fund, meaning that the assets are insufficient to cover all promised payments to both current and future retirees. A significant UAAL may suggest considerable financial pressure on the pension system, potentially necessitating increased contributions from employers, including cities, counties, or states, to rectify the shortfall. Presently, the City’s funding ratio stands at approximately 70%.
Employer-sponsored health insurance, which includes vital medical, dental, and vision coverage, is anticipated to experience a modest 3% increase in premium costs relative to the FY 24-25 Kaiser rate. This projection reflects current trends in healthcare expenses and underscores our commitment to providing valuable health benefits to employees and their families while navigating the complexities of the healthcare landscape.
All other expenditures are anticipated to increase by 3%, in accordance with prevailing economic trends, including the Consumer Price Index (CPI) for the San Francisco Area as of February 2025.
In addition to the assumptions outlined earlier, Attachment 1 presents a detailed and comprehensive list of notable budget increases. The proposed enhancements are carefully detailed, highlighting their anticipated impact on the overall budget. Below is a summary of these increases, emphasizing their implications for our financial planning and resource allocation.
The City’s annual budget is an essential planning tool that intricately aligns the services the community seeks with the projected resources available to deliver those services. These vital services encompass many areas, including public safety through the police department, park recreational opportunities, community development initiatives, essential public works projects, and efficient administrative functions. This comprehensive budget outlines a detailed financial plan for the upcoming fiscal year. It features a five-year forecast for the General Fund, allowing for thoughtful anticipation of future needs and opportunities that will foster growth and enhance the quality of life for all residents.
As the City undertakes the process of formulating the annual budget for FY 25-26, we invite community members to provide their valuable input concerning the priorities that are of utmost importance to residents, businesses, and other stakeholders. Our objective is to develop a budget that ensures the City’s financial sustainability while facilitating the continued provision of the services that our residents and businesses prioritize. Your feedback is essential in shaping a budget that reflects the collective needs and expectations of our community.
ANALYSIS:
The City utilizes fund accounting to ensure adherence to financial regulations and demonstrate transparency in its financial management. A fund is a collection of related accounts specifically organized to oversee resources allocated for particular activities or objectives. In the Analysis section of this report, you will find comprehensive and detailed information about the various categories of funds, highlighting their unique purposes and financial implications. The Analysis section of this report provides detailed information for the following fund categories:
General Fund Revenue Estimates
General Fund Expenditures Projections
General Fund Projected Net Annual Results
General Fund Reserves
General Fund Five-Year Forecast
Non-General Fund Programs
General Fund
The General Fund is the City's primary operating fund, providing essential financial support for various services. It is funded through multiple sources, including property taxes, sales taxes, business licenses, fines, forfeitures, and intergovernmental revenue. This fund is vital in supporting crucial services such as law enforcement, parks and recreation, public works—including street and facility maintenance—and essential government functions such as administration and finance.
Unlike funds allocated for specific purposes, such as water and sewer projects or capital improvements, the General Fund is utilized for a broad spectrum of City operations. Its importance cannot be overstated, as it ensures the continuous delivery of essential services and equips the City to respond effectively to unforeseen circumstances or economic fluctuations.
General Fund Revenue Estimates
As depicted in the graph and detailed in Attachment 2, the overall General Fund revenues for FY 25-26 are anticipated to experience a notable increase of approximately 5% in comparison to the audited actuals from the FY 23-24. This projected growth is primarily driven by the introduction of a new Franchise Fee from Republic Services, which marks a significant development in our revenue structure.
The core of the General Fund revenues is drawn from a variety of vital tax sources, including the Utility User's Tax (UUT), Sales Tax, Property Tax, Real Property Transfer Tax (RPTT), and Transient Occupancy Tax (TOT), among others. The synergy between these key revenue streams is critical; should one or more of these essential contributors halt their operations within the City of Hercules, it could lead to a dramatic downturn in revenues. Such a decline would not only threaten the financial stability but also compromise the availability of crucial programs and services for the community. This underscores the vital importance of maintaining a stable and diverse revenue base to ensure ongoing support for the needs of our residents.
Sales Tax
Sales tax revenue constitutes the most significant funding source for the City’s General Fund, which receives monthly remittances from the State. As a consumption tax levied on the sale of a wide variety of goods and services, sales tax is crucial for maintaining the City’s financial stability and operational sustainability.
Recent analyses conducted during the first quarter, utilizing comprehensive data from the California Department of Tax and Fee Administration (CDTFA), project a 2% increase in sales tax revenues compared to the audited actual figures for Fiscal Year 2023-2024. However, similar to many municipalities, we may be confronted with the possibility of a decline in estimated revenues for FY 25-26. This potential reduction could stem from various economic factors and evolving consumer spending trends, such as the increasing inclination toward online shopping and a significant decrease in discretionary spending, both of which could substantially impact sales tax revenue.
Furthermore, it is important to recognize that sales tax revenues are concentrated among a small number of key operators. Specifically, the top three sales tax producers account for over 50% of the City’s total sales tax revenues. As a result, any variations in revenue contributions from these crucial stakeholders could have considerable implications for funding future programs and services, highlighting the delicate nature of our fiscal landscape.
The following chart depicts the source of the City’s sales tax revenues by industry group.
Utility User’s Tax
The Utility User's Tax (UUT) is an 8% levy on the consumption of essential utilities that residents and businesses rely on daily. This tax encompasses a broad spectrum of services, including electricity, gas, water, sewer, and various forms of communication such as telephone (covering both cell phone usage and long-distance calls) and cable television. The city government is responsible for determining the tax rate and directing how the revenues generated from this tax are allocated to support community needs and services.
For the fiscal year 2025-2026, the City anticipates that UUT revenues will reach an estimated $4.2 million. However, amidst these projections, a concerning trend has emerged in the UUT revenues, specifically from Wireless Telecom. This decline is primarily attributed to the changes in the allocation structures of bundled service packages provided by telecom companies, which have shifted a more significant proportion of costs toward non-taxable data services.
Despite this setback, there is a silver lining; the anticipated drop in revenues from Wireless Telecom is expected to be counterbalanced by an increase in UUT revenues from other essential utilities, such as electricity, gas, and water. This increase is primarily a result of recent rate hikes in these services, which aim to address growing infrastructure needs and ensure that quality utilities remain available to the community. Thus, while challenges persist, the City's overall UUT revenue picture remains poised for stability through these adjustments.
The following chart depicts the source of the City’s UUT revenues by category:
Utility User’s Tax
Summary by Fiscal Year
Property Tax
The City of Hercules is classified as a low-to-no property tax jurisdiction, resulting in a limited revenue generation capacity. Consequently, the City receives only 5% of the base 1% property tax rate, which is substantially lower than the amount collected by most other jurisdictions.
In the current fiscal period, the Assessor's office has implemented a Consumer Price Index (CPI) factor of 2% for non-Prop 8 parcels, reflecting economic conditions and inflation considerations. It is estimated that the City’s share of the 1% assessed property value tax will be approximately $1.6 million for the FY 25-26.
City of Hercules
1% Weighted Tax Share
Compared to other jurisdictions
Franchise Fees
A City franchise fee is a monetary charge assessed by local governments on utility companies, including those that provide electricity, natural gas, water, and cable services. This fee grants these companies the authority to utilize public rights-of-way, such as roads, streets, and sidewalks, to deliver essential services to residents and businesses. In essence, the franchise fee functions as a form of compensation for the use of public space.
The franchise fee's primary aim is to help reduce the financial burden that cities and counties encounter in maintaining the infrastructure critical to utility companies, including roads and public facilities. This fee contributes to funding the necessary maintenance of vital community infrastructure and serves as a source of revenue for local governments, thereby enhancing their fiscal stability.
Franchise fees are typically outlined in a franchise agreement, constituting a formal contract between the utility provider and the local government. This agreement specifies the terms and conditions governing the utility's use of public space, ensuring a collaborative partnership that benefits both parties.
On March 25, 2025, the City Council adopted a resolution reaffirming the Solid Waste Franchise Agreement between the City of Hercules and Richmond Sanitary Service, Inc., operating as Republic Services. As part of this agreement, Republic Services is anticipated to increase its annual payment to the City by approximately $195,000.
Transient Occupancy Tax (TOT)
TOT, often called the "hotel tax," is a charge levied on individuals who temporarily occupy rental properties. Each guest who stays at these accommodations is mandated to pay 10% of the rental amount set by the property operator. The revenue generated from this tax plays a crucial role in funding the City's General Fund, which supports various public services and initiatives.
In light of recent developments, the City anticipates a significant increase in TOT revenue, driven by the rise of innovative accommodation options such as Airbnb and other short-term rental operations. Additionally, Hercules Self-Storage Management LLC is expected to contribute to this growth. As outlined in the Development Agreement with this storage facility, the City is entitled to receive 10% of the rental income in lieu of the TOT. This agreement activates once a 90% occupancy threshold has been achieved or three years have elapsed since the City awarded a Certificate of Occupancy—whichever milestone occurs first.
Commencing in the FY 24-25, the City initiated the collection of this revenue from the storage facility. With projections suggesting an annual influx of an additional $200,000, this new funding stream is poised to enhance the City's financial resources, benefiting local projects and services.
Parks & Recreation Program Revenues
Hercules Parks & Recreation provides a comprehensive program to serve the community. These offerings include summer camps, organized sports leagues, educational classes, and various cultural events. The revenue generated by Parks & Recreation experienced a significant decline during the pandemic, primarily due to reduced available programs and the temporary closure of facilities. Nevertheless, the proposed FY25-26 budget projects a continued increase in program revenues, leveraging the actual revenue data from FY 23-24. This forecast reflects a positive trend, indicating a renewed community engagement in recreational activities.
Fees for Services
The City establishes fees that reflect the costs associated with the various services rendered to the community. These fees are detailed in the City’s Master Fees Schedule, which is subject to periodic approval by the City Council. Individual fees may be adjusted at any time during the fiscal year, provided there is a clear linkage to the costs incurred in providing those services.
On October 10, 2023, the City completed a comprehensive user fee study aimed at determining suitable cost recovery levels for services that primarily benefit specific individuals or groups, rather than the general public. Following this analysis, the newly established fees were officially adopted on October 24, 2023, thereby ensuring that the fee structure is aligned with the value delivered to the community.
Cell Tower Leases
The City of Hercules entered into cell tower lease agreements, which allow telecommunications companies to install and operate cell towers on city-owned land or structures in exchange for rental payments. This arrangement supports enhanced wireless communication services for residents and businesses and generates a consistent revenue stream for the municipality. The income derived from these cell tower leases is projected to increase by 2%, reflecting the growing demand for reliable connectivity in today's digital environment.
General Fund Expenditure Projections
The General Fund tracks the sources and uses of resources that are mainly at the discretion of the City Council for providing activities, programs, and services that the community considers necessary and desirable. Expenditures from the General Fund are strategically directed toward enhancing public safety, maintaining public infrastructure through public works, fostering community development, and enriching parks and recreational opportunities. Additionally, it supports essential administrative functions, ensuring that the City runs smoothly and effectively meets the needs of its citizens. The illustration below shows the General Fund expenditures by program:
Based on the assumptions outlined previously, the ongoing expenditures of the General Fund are projected to increase by 5% relative to the budget for the prior fiscal year. This estimation is intended to ensure adequate funding for essential services and responsibilities. A comprehensive summary of these projections is included in Attachment 2.
General Fund Projected Net Annual Results
The General Fund is projected to conclude the fiscal year with favorable operating results amounting to $423,000, alongside an operating reserve of $5 million. This reserve represents 25% of the overall General Fund budget, highlighting effective financial management and ensuring a stable foundation for future fiscal planning.
General Fund Reserves
General fund reserves, commonly referred to as rainy day funds, are financial allocations made by governments to address unforeseen costs or economic downturns, functioning as a critical financial buffer. These reserves are primarily employed for one-time, unbudgeted expenditures or to mitigate financial risks. The overarching goal of establishing a general fund reserve is to enhance financial stability by accommodating unexpected expenses and reducing the impact of financial uncertainties.
Below shows the detail description of the General Fund reserves which identifies the type of reserves and projected FY 25-26 ending balance:
Within the general fund, there are three distinct types of reserves:
Restricted: These funds are designated for specific purposes and cannot be utilized for general expenditures due to financial, accounting, or legal restrictions.
Designated: These funds are earmarked for purposes as determined by a governing body and can be deployed in accordance with their designated objectives.
Unrestricted: These funds are available for any purpose and are not subject to any restrictions.
General Fund Five-Year Forecast
The Five-Year Forecast offers both a current and long-term financial assessment of revenues, expenditures, fund balances, and operating reserves. Its primary goal is to provide the City Council and the community with an economic outlook while identifying significant issues that may need to be addressed during the annual budget development process.
It’s important to note that a forecast is not a budget. Based on certain assumptions, the Five-Year Forecast serves as a tool that projects future financial conditions. If future deficits are anticipated, the forecast provides an opportunity to take corrective measures to maintain financial stability.
This analysis focuses on the City's General Fund, which is the main operating budget for tax-supported municipal services. Long-range financial forecasting helps the City make informed decisions that enable us to sustain the community's core services. Best practices recommend that the City update this plan annually. As indicated in Attachment 5, the General Fund can accommodate the additional ongoing costs requested in the proposed budget.
However, the five-year forecast includes an assumption regarding a one-time full repayment of all CalHFA loans as agreed on October 18, 2013. Fortunately, there are sufficient funds in the operating reserve to cover this loan repayments.
Non-General Fund Programs
Special Revenue funds
Special revenue funds are designed to track and manage revenues that are designated for specific programs or projects. This approach ensures transparency and accountability in how these funds are utilized. These revenues often come from grants or other specific funding sources that support particular purposes, such as transportation, building permit services, and various restricted programs.
Because these funding sources are restricted, it is necessary to track revenues and expenditures separately from the City’s primary operating fund, known as the General Fund. There is currently enough funding to complete existing projects and programs; however, the initiation of new programs or projects will depend on the availability of future funding sources.
It's important to highlight that two areas—the Victoria by the Bay Lighting and Landscaping Assessment District (LLAD) is projected to end the fiscal year with significant deficits. City staff are actively working on a comprehensive strategy to address the deficit in the Victoria by the Bay LLAD in line with the Council's direction.
The following are funds under the Special Revenue category:
Asset Seizure (Fund #101): The City has established a forfeited assets fund designed to manage the financial proceeds obtained from drug-related assets seized by the police. This fund is essential for accounting for the monetary amounts and property confiscated during law enforcement operations addressing illegal drug activities. The funds will remain in custody until a final court determination is made, ensuring compliance with legal standards. Moreover, these resources are strictly restricted for use in activities pertaining to law enforcement.
AB 3229 COPS Program (Fund #201): The California State Legislature initiated the Citizens Options for Public Safety (COPS) program, a vital initiative designed to enhance front-line law enforcement services across the state. Each year, the City benefits from approximately $150,000 in funding through this program. These essential funds are seamlessly integrated into the General Fund, providing crucial financial support that helps offset the costs associated with police services. This program plays a significant role in ensuring the safety and security of the community by bolstering the resources available to law enforcement agencies.
Landscaping and Lighting Assessment Districts (LLADs): This funding is designated exclusively for landscaping and lighting maintenance, as well as capital improvements in city parks, along major roads, and within each of the five Landscaping and Lighting Assessment Districts (LLADs). The five LLADs encompass approximately 8,500 parcels. An annual assessment must be submitted to the county and included on the county tax rolls yearly. An engineer's report outlining the budget and assessment amount must be prepared to support this. Staff are working on the assessment and budget, which will be included in the budget documents once finalized.
Stormwater (Fund #231): Stormwater funds are established to address the costs associated with managing stormwater runoff. This encompasses activities such as regulatory compliance, planning, maintenance, capital improvements, and infrastructure repairs. Typically, these funds are financed through user fees, ensuring that those who benefit from stormwater management services contribute to their expenses. The activities supported by the Stormwater fund are currently exhibiting a favorable trend and are anticipated to continue improving as the years progresses. Staff will persist in monitoring and analyzing the financial health of the fund to ensure adherence to the Clean Water Act and other regulatory requirements.
Development Impact Fees (DIF): Under the California Mitigation Fee Act (AB 1600), municipalities and counties have the authority to implement Development Impact Fees (DIFs). This legislative provision allows local governments to levy fees on new development projects to finance public infrastructure and facilities, improvements, and community amenities commensurate with the development's impacts. These fees ensure that the financial responsibilities associated with new developments are appropriately allocated and that infrastructure development aligns with community needs. It is essential to note that DIFs are not permissible for covering operational and maintenance expenses, nor can they be utilized to address existing capital or infrastructure deficiencies. Their primary objective is to mitigate the effects of new development projects on public facilities and services. The City DIF funds are categorized as follows and their respective available fund balances projected in FY 25-26:
Public Facilities (Fund #241): $160,534
Community Development Tax Fund: $10,478
Other Development Fee (Fund #243): $76,657
Police Facilities (Fund #244): $81,366
Parks & Recreation (Fund #247): $8,276
Public Benefit Fee (Fund #249): $1,039,867
Transportation Facilities (Fund #261): $477,493
State Gas Tax (Fund #262): A gas tax fund, or Highway Users Tax Account (HUTA), is a dedicated fund that receives revenue from taxes on gasoline and diesel fuel, which is then used to finance transportation-related projects like road construction, maintenance, and public transit.. The primary purpose of a gas tax fund is to ensure that the revenue generated from fuel consumption is used to maintain and improve the infrastructure that supports transportation, including roads, bridges, and public transportation systems. The revenue for these funds comes from excise taxes (a tax on the sale of a specific good, in this case, gasoline and diesel fuel) levied on the sale of these fuels. The revenue estimate for FY 25-26 is $738K.
Measure J Street Fund (Fund #263): The Measure J Fund is a specialized revenue fund established to account for the income generated by the County's ½ cent sales tax measure. This fund is exclusively designated for initiatives related to street maintenance and improvements, functioning in a manner analogous to the Gas Tax. The resources allocated to the Measure J Fund are intended solely for purposes that enhance and preserve the integrity of the County’s transportation infrastructure. The revenue estimate for FY 25-26 is $493K.
SB1 Road Maintenance and Rehabilitation Account (Fund #268): Senate Bill (SB) 1, Chapter 5, Statutes of 2017, was a transformative piece of legislation aimed at revitalizing the aging infrastructure of California’s transportation systems. This bill established the Road Maintenance and Rehabilitation Program (RMRP), an initiative designed to combat the significant backlog of maintenance needs affecting both the extensive State Highway System and the intricate local street and road networks. Furthermore, the legislation created the Road Maintenance and Rehabilitation Account (RMRA), a dedicated funding source to support these vital efforts.
A portion of the funds generated through the RMRA will be distributed according to a specified formula to eligible cities and counties, as stipulated in Streets and Highways Code section 2032(h). This funding is crucial for executing essential maintenance tasks, undertaking comprehensive rehabilitation projects, and implementing critical safety enhancements on local streets and roads. Through this program, communities will be better equipped to maintain their infrastructure, ensuring safer and more reliable transportation for all residents. The revenue estimate for FY 25-26 is $684K.
Solid Waste and Recycling (Fund #291): The funding is from the rate differential between the fees collected by Richmond Sanitary Services (RSS) per their franchise agreement with Hercules and the “new” fees for the post-collection agreement negotiated in 2013 with the West Contra Cost Integrated Waste Management Authority (WCCIWMA), of which Hercules is a member agency (RSS’s monthly bills to residents and businesses includes both the collection service component and post-collection service component). The differential occurred when lower post-collection fees were adopted in late 2013 due to the payoff of the bond financing for the Integrated Resource Recovery Facility that was constructed in Richmond. In January 2016, the City Council authorized funding for several important initiatives aimed at enhancing public infrastructure and environmental sustainability. These initiatives include repairs to streets impacted by garbage trucks, comprehensive street sweeping, the removal of debris from the stormwater system, and the enforcement of the plastic bag ban. FY 25-26 estimated ending available balance is $293K.
Water Quality Retention Basin (Fund #387): This fund is established to collect revenues generated from the Property Tax Special Assessment associated with the creation of the City of Hercules Community Facilities District No. 2017-01, formed on April 11, 2017. The development projects at Bayfront and Muir Pointe necessitated the construction of a water quality detention basin to manage and mitigate runoff produced by the enhancements made to support these developments. The establishment of this Community Facilities District (CFD) provides a structured funding mechanism to address the ongoing maintenance costs linked to the water quality detention basin, thus ensuring both environmental protection and community health within the district. FY 25-26 estimated ending available balance is $315K.
Regional Water Quality (Fund #521): This fund accounts for the Regional Water Quality. Created by the State Legislature in 1967, the Board protects water quality by setting statewide policy, coordinating, and supporting the Regional Water Board efforts, and reviewing petitions that contest Regional Board actions. There are nine regional water quality control boards that exercise rulemaking and regulatory activities by basins. FY 25-26 estimated ending available balance is $55K.
BART Park & Ride (Fund #266): This fund is designated for the maintenance of BART's park-and-ride facility, ensuring its operational integrity and user satisfaction. BART will finance the maintenance expenses through a revolving fund mechanism, thereby preventing any out-of-pocket expenditures for the City. This approach facilitates consistent upkeep and fosters an efficient transit environment for all commuters.
General Plan Update Fee and Building Training Fee (Fund #267): A general plan update fee is a fee charged by local jurisdictions in California to recover costs associated with preparing, updating, and revising their general plans and associated elements, which are blueprints for meeting a community's long-term vision. These fees are intended to cover the expenses incurred by local agencies in developing and maintaining their general plans, which are required by California law to address various aspects of community development, including land use, circulation, housing, and more. FY 25-26 proposed budget of $1.3 million is to acquire services of a consultant to develop a comprehensive updates to the City’s general plan land use, economic development, open space & conservation, and noise elements, and related updates. The projected ending available balance for FY 25-26 is $94K.
Successor Housing: On February 27, 2024, the City Council adopted a resolution designating the City as the Housing Successor to the Hercules Redevelopment Agency. This designation allows the City to effectively manage $4.3 million in outstanding loans and access $5.3 million in Housing Funds. These resources will be utilized to cover administrative expenses and support the development of affordable housing, particularly for households classified as extremely low to low income.
Furthermore, on January 28, 2025, the City Council approved a resolution establishing the policies and procedures manual for the administration of Hercules Successor Housing loans. This manual is designed to ensure consistency and fairness in the administration and oversight of approximately 41 collectible loans issued by the former Redevelopment Agency, which had a total collectible loan balance of $3.8 million as of June 30, 2024.
Sewer Enterprise Fund
On January 23, 2001, the cities of Hercules and Pinole formalized a joint letter agreement concerning the operation and ownership of the Pinole/Hercules Wastewater Treatment Plant. The City of Hercules holds a fifty percent undivided ownership interest in the plant, while the City of Pinole is responsible for its management and operations. Hercules maintains responsibility for the operation and upkeep of its own wastewater collection system. Furthermore, the City of Pinole is tasked with managing the records and accounts related to all transactions associated with the wastewater treatment plant.
The City of Hercules owns and operates a collection system comprising over 60 miles of underground piping, along with five lift stations. The wastewater generated from this collection system is treated at the Hercules-Pinole Wastewater Treatment Plant (WWTP), which is operated by the City of Pinole. Hercules owns half of the WWTP.
The City generates approximately $6 million annually in service charges from over 8,400 connections, which are billed through the County tax roll. Additionally, developers are required to pay impact fees to ensure there is sufficient capacity for the wastewater generated by their projects.
The Sewer Enterprise Fund is dedicated exclusively to the operations, maintenance, and capital improvements of the sewer system. The revenues collected from sewer fees are strictly allocated for sewer-related purposes and cannot be diverted to non-sewer-related expenditures. For the FY 25-26, the proposed operating budget is estimated at $6.7 million, which includes planned capital improvements of $536K and an annual debt obligation payment of $2.1 million. Staff are currently conducting a comprehensive study on sewer rates to evaluate the fund's financial health, with findings to be presented to the Council upon completion.
Internal Service Funds (ISF)
ISFs are established to account for activities that provide goods or services to other departments within a government, rather than to the general public. The City uses five Internal Service Funds (ISFs). Three of these funds are dedicated to the management of capital replacement and asset management for vehicles, facilities, and technology items. The remaining two ISFs focus on overseeing the City’s Information Technology (IT) Operations and Facilities Maintenance.
Vehicle Replacement: The City has developed a vehicle replacement cycle plan. This model outlines a schedule for replacing vehicles based on their age and mileage. Some vehicles need to be replaced before reaching their targeted age and mileage thresholds, while others may remain in service longer than planned. Each vehicle is evaluated using these criteria, along with an assessment of maintenance and fuel costs, to determine the optimal time for replacement. For the FY 25-26, the estimated available balance for future vehicle replacements is $485K.
Information Technology Operations: The Information Technology Fund is critical in providing the City with a comprehensive range of technology-related services. It encompasses components of essential networking and infrastructure technologies, including high-capacity servers and sophisticated switching systems that facilitate efficient data transmission. The fund strongly emphasizes security and cyber protection, ensuring the safeguarding of digital assets against potential threats.
Additionally, it guarantees reliable internet connectivity, which is vital for departments to access essential online services and resources. The service desk operates as a key support mechanism, addressing and resolving technical issues as they arise. Furthermore, well-defined disaster recovery plans are implemented to protect critical data and maintain operational continuity in the event of unforeseen circumstances. Collectively, these elements constitute a robust framework of data communication technologies designed to enhance the efficiency and resilience of the City’s technological infrastructure.
FY 25-26 proposed IT operating Budget is estimated to be $1 million. Resources are from administrative charges to departments based upon their proportional share of program costs.
Facilities Maintenance: The fund accounts for Facility Maintenance and provides and manages maintenance and emergency structural repair services for all City facilities. The source of revenue is reimbursement from departments for the cost of providing facility maintenance services. This interservice fund pays for the maintenance and repair of the City’s facilities which include:
City Hall (including the Police Departement)
Senior Center
Library
Lupin & Hanna Kids Center
Teen Center
Community Center
Ohlone & Foxboro Community Center
Activities include contract janitorial, HVAC, plumbing and other miscellaneous activities; various repairs and improvements performed by City staff, and utilities. FY 25-26 proposed Facilities Maintenance Budget is estimated to be $1.2 million. Resources are from charges to departments based upon their proportional share of program costs using the square footage of the building they occupied.
Facility Replacement ISF: This fund is designated to support the major replacement of City buildings and facilities. Currently, there is a considerable backlog of significant maintenance projects, particularly at City Hall and the Police Department.
IT Equipment Replacement ISF
This fund will be used to replace infrastructure and equipment used to support City technology needs (servers, switches, data security, etc.). This model is in development, and expenditures are currently charged together with IT Operations as “pay-as-you-go.” The ISF plays a crucial role in financial management by receiving contributions from various operating funds, including the General Fund, Special Revenue Fund, and Sewer Enterprise Fund. These contributions not only support the ongoing operations of the organization but also facilitate future capital replacements.
The utilization of internal service funds allows for a more equitable distribution of costs over the asset's useful life. This budgeting approach is beneficial as it reduces the need for substantial financial allocations in one year followed by smaller ones in subsequent years. Instead, it involves calculating estimates for repairs or replacements in advance, with allocations made from the operating budget into the internal service funds. This proactive strategy ensures that resources are available when needed, promoting efficiency and financial stability.
Debt Service Funds
The Debt Service Fund is responsible for accumulating financial resources to cover the payment of principal, interest, and related costs for general long-term debt, primarily funded by taxes levied by the City. Debt is issued as necessary to support infrastructure improvements.
Below is a summary of the City's long-term debt and the debt service payment obligations for FY 25-26:
CalHFA Loans
The City received loans from CalHFA through the Residential Development Loan Program (RDLP) and the Housing Enabled by Local Partnerships (HELP) to build the Sycamore North project, also known as the Aventine development. The City expected income from leasing the residential units to be enough to repay these loans. However, the actual cost to finish the project was much higher than the budget set by the City and the Redevelopment Agency. As a result, the project failed and was put up for sale to find a qualified developer who could offer the best deal. Now, the City is responsible for repaying the loans.
In 2012, City staff talked to CalHFA and negotiated new loan terms after several meetings. They extended the payment deadline and lowered the interest rate from 3% to 1.5%. The updated loan agreements for CalHFA Loan No. HELP-080604-03 and RDLP-060506-01 were signed on April 11, 2005, and February 15, 2007. These agreements will end on April 11, 2027, and August 15, 2026. The remaining loan balance must be paid in full by the contract expiration dates.
Capital Improvement Projects (CIP)
Each year, the staff prepares and presents a Capital Improvement Program (CIP) budget to the City Council for adoption, alongside the operating budget for the forthcoming fiscal year. The CIP budget is established for a single year, but it encompasses projected programming over a ten-year period.
The development of the CIP is informed by a variety of sources, including assessments of ongoing projects, active grant applications, community and Council requests, regulatory mandates, and an array of condition reports, studies, and workgroup evaluations. This comprehensive process involves the evaluation and prioritization of infrastructure needs. Staff meticulously balances these needs with available funding in order to formulate the CIP, prioritizing projects for funding as early as possible within the five-year program, contingent on financial resources. However, the demand for projects markedly exceeds the available funding over the ten-year horizon. Accordingly, the staff maintains a list of projects that are not recommended for funding, referred to as 'unfunded projects,' for potential consideration in subsequent years. Attachment 7 includes the project list and its corresponding funding sources for FY 25-26, as summarized below.
FISCAL IMPACT:
This report has no direct fiscal impact. Direction provided by the City Council will be incorporated into the FY 25-26 Annual Budget.
ATTACHMENTS:
FY 25-26 List of Additional Budget Requests
FY 25-26 Proposed General Fund - Fund Summaries
FY 25-26 Proposed Special Revenue Budget - Fund Summaries FY 25-26 Proposed Sewer Enterprise Budget - Fund Summaries FY 25-26 Proposed Internal Service Budget - Fund Summaries FY 25-26 Proposed Debt Service Budget - Fund Summaries
FY 25-34 Proposed Capital Improvement Projects (CIP) – Spending Plan and Funding Sources Presentation
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