STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of July 22, 2025
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: Discussion Regarding Potential Revenue-Generating Options RECOMMENDED ACTION:
Staff recommends that the City Council receive the report on potential revenue-generating options and, by minute order, provide guidance to staff on which option or options to pursue.
BACKGROUND:
Although the City recently adopted a balanced budget for the fiscal year, we anticipate long-term challenges will emerge due to expected inflation in the costs of goods and services. Over the next decade, staff has identified a need for more than $10.6 million to address local street paving, maintain aging public facilities and parks, and preserve essential city services and programs in a growing City.
The continual increase in the costs to sustain current levels of service will become more challenging overtime without additional revenue. The result will be a decrease in the quality of services provided to the community and limit our ability to complete critical infrastructure and maintenance projects within a reasonable timeframe.
To proactively address this issue, the City Council adopted a Strategic Goal for 2024-2026 to improve the City’s financial sustainability. A main aim of this goal is to identify potential revenue sources that can effectively serve both current and future needs. This report presents various revenue-generating options for the City Council to consider, including increasing Sales Tax, Utility Users' Tax (UUT), and Real Property Transfer Tax (RPTT) rates, as well as general obligation bond financing.
ANALYSIS:
It is crucial for the City to thoroughly assess its long-term financial trends beyond the limits of the annual budget cycle and multi-year capital planning. Effective long-term financial planning is a strategic effort that involves projecting revenues and expenses and examining key factors that could greatly impact the organization's financial stability over time.
By understanding these long-term trends and identifying potential risks that could jeopardize financial sustainability, City staff can address issues proactively before they escalate. A robust long-term financial planning process also allows the City Council to focus on its overarching goals and priorities, thereby fostering a culture of strategic thinking and enhancing the organization's collective financial literacy.
On June 10, 2025, the City Council adopted the annual budget for FY 25-26. A key component of this budget was the Five-Year Financial Forecast for the General Fund. This forecast delineates anticipated revenues and expenditures to assess the financial health of the City and to identify emerging trends. Below, a chart is provided that summarizes the City’s Five-Year Financial Forecast.
The forecast includes a planned 3% annual cost-of-living adjustment to employee salaries and is based on assumptions of ongoing economic growth and stable financial health, signaling an expected balanced budget for the General Fund.
General Fund Revenue: Where does the money come from?
The General Fund revenue for a City is primarily supported by local taxes, which play a crucial role in funding essential services and initiatives. This includes a variety of tax sources such as sales tax, which is collected on retail purchases, utility users' tax imposed on services like water and electricity, and property tax based on property values. Additionally, the fund receives in lieu of vehicle license fees, user fees for specific municipal services, and other discretionary sources of revenue. Notably, a significant portion—approximately 80%—of this revenue stems from these tax contributions, highlighting taxation's vital role in the city's financial health and ability to serve its residents effectively.
General Fund Expenditure: Where does the money go?
The General Fund serves as the City's primary operating fund. It 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.
What has the City done to address revenue challenges?
To proactively address revenue challenges while maintaining acceptable service levels, the City has implemented a series of constructive measures:
Launched efficiency initiatives incorporating new technology and process improvements to enhance service delivery.
Fostered greater collaboration to secure regional grants, maximizing funding opportunities.
The refinancing of the City’s lease revenue bonds has resulted in debt service savings exceeding $2 million over the life of the bonds.
Increased the number of grant applications submitted to diversify funding sources.
Engaged proactively with state and federal representatives to seek additional funding support.
Updated the City's user fees to ensure they align with the increasing service costs.
Used non-recurring revenue to pay for deferred maintenance and critical infrastructure needs The City also recognizes the significant importance of addressing deferred maintenance on its assets. In this context, staff have conducted thorough assessments of the Parks and Recreation systems as well as city-owned facilities, leading to the formulation of the Parks and Recreation and Facilities Master Plan. This plan aims to promote long-term financial sustainability by establishing a strategic investment framework that prioritizes essential improvements to parks, enhancements to existing facilities, and the development of new recreational areas.
In our efforts to address the needs of the community and sustain essential services, it is increasingly apparent that identifying new sources of revenue is critical for ensuring the City’s long-term financial stability. By actively pursuing innovative funding opportunities and forging strategic partnerships, we seek to enhance our financial foundation, thereby improving our ability to serve our residents more effectively.
Additional Tax Initiatives
The City suggests several effective strategies to establish additional and consistent revenue streams that will support the Council in achieving its goals. It is important to emphasize that implementation of these strategies will require voter approval. Moreover, we can tailor these tax structures in various formats to effectively align with the Council's specific revenue objectives.
The following is a summary of the various types of taxes that can be implemented.
Sales Tax
The City has the potential to enhance its revenue by increasing the sales tax on purchases made within its jurisdiction. Local governments, which encompass both cities and counties, possess the authority to impose additional sales and use taxes to address their financial requirements. Presently, the sales tax rate in the City stands at 9.25%, while Contra Costa County has established a maximum rate of 9.75%. This provides the City with an opportunity to raise its sales tax by an additional 0.50%. Should the City choose to pursue this increase, it is projected that it could generate an additional $2 million a year in revenue, which could be allocated to support vital public services. The table below shows the sales tax rate comparison with nearby Contra Costa County cities:
Real Property Transfer Tax (RPTT) or Documentary Transfer Tax The city of Hercules currently enforces a property tax transfer rate of $1.10 per $1,000 of property value at the time of sale. This tax is typically incurred by the buyer, the seller, or both parties involved in the transaction, with the revenue generated being allocated between the city and the county.
It is noteworthy that only charter cities possess the authority to modify this rate through a ballot measure subject to voter approval. As Hercules is classified as a general law city, any proposal to increase the property tax transfer rate would require the city to obtain charter city status, as well as receive endorsement from the electorate.
At the present rate of $0.55 per $1,000, Hercules generates approximately $135,000 annually from the Real Property Transfer Tax (RPTT). This revenue is vital for supporting various public services and community initiatives within the city. Based on average property sales data from 2020 to 2024, which reflects an average property price of $750,000, it is projected that the city could realize an additional $245,000 in annual revenue for every $1 increase in RPTT rates.
A comprehensive guide for becoming a charter city to enhance the Real Property Transfer Tax (RPTT) is included in Attachment 1 for reference.
Utility User Tax (UUT)
The utility users' tax (UUT) is a fiscal measure introduced in California in 1967. This tax can be applied to a variety of essential utility services that residents rely on daily, including electricity, natural gas, water, sewage disposal, and telecommunication services such as traditional landlines, mobile phones, and long-distance calling. In recent years, local governments have expanded the scope of this tax to include modern digital services, such as internet access, streaming platforms, and video conferencing applications, reflecting the evolving landscape of consumer utilities.
The revenue generated by the UUT can vary significantly based on the specific utilities being taxed and the established tax rate. Utility companies are responsible for collecting these taxes directly from their customers and remitting the funds to the respective city governments.
The current utility users' tax (UUT) rate for the City is set at 8%. This tax serves as a significant revenue source for the General Fund, accounting for approximately 20% of its total revenues and contributing roughly $4 million to the City's annual budget. This financial support is essential for the provision of general services. Additionally, a 1% increase in the UUT rate has the potential to generate approximately $500,000 in additional annual revenue.
As mentioned, these tax initiatives require voter approval. There are two options for election dates:
On the date of the next regular Council election that is not less than 88 days after the Council meeting at which the petition is certified, or On a special election date that is between 88 and 103 days after the council meeting at which the petition is certified.
According to information from Contra Costa County, the estimated cost for conducting a regular election ranges from $2.50 to $4 per registered voter. This results in a projected total cost of approximately $45,000 to $70,000. In contrast, the estimated cost for a special election is between $11 and $14 per registered voter, leading to an overall expense of approximately $190,000 to $250,000, based on the current voter registration figure of 17,152 individuals. Furthermore, if a primary election can be consolidated with a special election, it is anticipated that the associated costs will be comparable to those of a regular election.
The following outlines the process and timeline for placing a General Tax on the ballot. Typically, the duration required to execute this process is approximately one year.
Special Election (June 2026 Timeline):
The timeline for June 2026 presents several challenges that we must consider. To ensure we gather meaningful community input and conduct thorough opinion research, it is essential to allow adequate time for these processes. The current timeline indicates that if we choose to place the measure on the ballot in June 2026, staff would need to initiate preparations as early as July 2025, a deadline that has already passed.
Regular Election (November 2026 Timeline):
Special Election (June 2027 Timeline):
Bonds
An alternative funding option for the City is to issue bonds. This approach allows local governments to finance various projects at significantly lower interest rates than many other financing methods. The reason for this advantage is that these bonds are backed by the full faith and credit of the government entity, instilling confidence in investors and reducing the perceived risk. As a result, issuing bonds can be a financially beneficial strategy for the City to secure the necessary funds for development and infrastructure improvements.
The following is a summary of the various types of bonds that can be implemented.
General Obligation (GO) Bonds
General obligation (GO) bonds constitute a category of municipal bonds in which the issuer undertakes the obligation to repay bondholders through the exercise of its full faith and credit, in conjunction with its taxing authority. This obligation necessitates the deployment of all available financial resources, including tax revenues, to facilitate the repayment of the associated debt. The issuance process is typically contingent upon obtaining voter approval, involves a competitive bidding process for selecting underwriters, and relies on tax revenues as the primary means of debt repayment. The collection of ad valorem taxes used to repay GO Bond debt is in addition to the standard one percent general ad valorem property tax currently imposed on property owners.
GO Bonds are vital tools for local governments seeking to finance essential infrastructure projects that contribute to the well-being and development of their communities. These bonds stand out because they are relatively inexpensive to issue due to low borrowing costs, making them an appealing choice for investors looking for secure investments.
While the issuance of GO Bonds presents numerous advantages, such as affordable financing and strong community support, there are also potential disadvantages that must be considered, outlined in the following:
Advantages
Generates new revenue source to repay debt
Broad-based tax support for public improvements
Lowest interest cost due to ad valorem security and unlimited tax pledge Disadvantages
Time, expense and uncertain outcome of the election
Property tax increase that is passed through to residents GO Bond proceeds can be used for a variety of projects, including:
Capital Improvements: Construction, repair, or rehabilitation of roads, highways, bridges, and parks and parks.
Affordable Housing: Subsidies for affordable housing projects, and other affordable housing programs.
Public Safety: Funding for public safety facilities.
The tax base of the City has grown by 92% since 2014. For the fiscal year 2023-24, the assessed value (AV) is approximately $4.7 billion, with an average annual growth rate of 6.8%.
Based on the projected growth in assessed value (AV), the City is anticipated to generate approximately $27.9 million in bond proceeds. With an estimated annual assessed value growth rate of 3.5%, the potential for bond proceeds could rise to as much as $44 million. The following illustration outlines the tax implications for residents regarding the bond proceeds range from $27.9 million to $44 million:
The process and timeline for placing a GO Bond Measure on the ballot (November 2026 Timeline):
Summary Conclusion and Recommendation
In summary, as previously discussed, the staff has identified several effective strategies for generating additional and dependable revenue streams to fulfill the Council's objectives. It is essential to note that most of these options will necessitate voter approval, thereby emphasizing the importance of community engagement in the decision-making process. Moreover, various methods are available for structuring these taxes, enabling the Council to determine the annual revenue required to achieve its objectives.
It is recommended that the City consider enhancing its sales tax to align with the rates of surrounding jurisdictions. Currently, the City's sales tax rate is set at 9.25%. Given the established cap of 9.75% in Contra Costa County, the City has the opportunity to increase its sales tax by an additional 0.50%. This proposed adjustment has the potential to generate an additional $2 million annually for the General Fund, which would significantly support essential public services.
To address unmet infrastructure needs, the staff proposes the issuance of General Obligation (GO) bonds. As discussed in the section, this strategy enables local governments to finance a range of projects at interest rates significantly lower than those associated with alternative financing methods. This benefit is attributable to the bonds being backed by the full faith and credit of the City.
Based on the guidance from the City Council during tonight's meeting, staff is ready to move forward with the Council’s preferred revenue-generating initiatives.
FISCAL IMPACT OF RECOMMENDATION:
There are no fiscal impacts associated with this report.
ATTACHMENTS:
Staff Report – RPTT Charter City Discussion
Presentation