STAFF REPORT TO THE CITY COUNCIL
DATE: Regular Meeting of November 12, 2025
TO: Mayor and Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Director of Finance
SUBJECT: FY 25-26 1st Quarter Budget Report
RECOMMENDED ACTION:
Review and accept the First Quarter Budget Report for the fiscal period concluding on September 30, 2025.
COMMISSION/SUBCOMMITTEE ACTION AND RECOMMENDATION:
This report will be presented to the Finance Commission at their regular meeting on November 19, 2025.
EXECUTIVE SUMMARY:
City staff prepares quarterly financial reports to provide a thorough overview of the City funds. These reports are designed to inform the community, the Council, and the organization by presenting a detailed comparison of the annual budgeted amounts against the actual revenues and expenditures of the operating departments.
The financial information included in these reports is based on preliminary, unaudited data derived from the municipal financial system as of the report date. It is important to recognize that seasonal fluctuations and specific events within municipal operations may influence the proportion of revenues collected and expenditures incurred to date, which could subsequently affect the overall financial assessment.
DISCUSSION:
This report presents a comprehensive summary of the City’s financial performance for the three-month period ending on September 30, 2025. It includes a thorough analysis of the General Fund, a review of the Capital Improvement Program, and a consolidated overview of other City funds, all reported on a cash basis of accounting. Under this method, revenues are recognized upon receipt, ensuring clarity in income reporting, while expenditures are recorded when payments are processed, allowing for accurate tracking of cash flow.
GENERAL FUND
The General Fund serves as the primary operating fund of the City, encompassing all financial activities that are not allocated to other designated funds. Various general revenue sources, including property taxes, sales taxes, other general taxes, and fees, primarily support this fund. The expenditures from the General Fund are directed towards essential services that uphold the community's safety and welfare, including public safety, public works, and general government administration. These services are integral to maintaining effective governance and infrastructure, thereby comprehensively addressing the needs of the residents.
The Fiscal Year (FY) 2025-26 General Fund budget is projected to generate total revenues of $20.9 million. As of September 30, 2025, the General Fund has successfully collected $4 million, which constitutes 19% of the estimated revenues for this fiscal year. Notably, this collection rate represents a 5% increase compared to the same period in the previous fiscal year.
The expenditure appropriations for the General Fund for fiscal year 2025-26 are set at $20.5 million. As of September 30, 2025, actual expenditures totaled $5.3 million, representing 26% of the FY 2025-26 budget. This is 1% lower than the same period in the previous fiscal year.
As is typical with the General Fund, the information available from the first quarter is not sufficient to make accurate projections regarding the fiscal year’s performance. The primary objective of this report is to highlight significant deviations—both positive and negative—encountered thus far in relation to a standard first quarter. Furthermore, this report aims to identify areas that may require additional attention in the future. Comprehensive details regarding revenues and expenditure are provided in the subsequent sections of the report.
General Fund Revenue Analysis
General Fund
Revenues
About 79% of the General Fund revenues comes from taxes in the following categories:
Utility Users Tax (UUT)
Sales Tax
Property Taxes
Vehicle License Fees (VLF)
Business License Fees
Real Property Transfer Tax (RPTT)
Franchise Fees
Transient Occupancy Tax (TOT)
The City substantially relies on its General Fund revenues, which are primarily derived from economically sensitive sources, including property taxes, sales taxes, and utility user taxes. These revenue streams are essential in shaping the financial framework of the City. Any underperformance or deviation from anticipated projections in these critical sources can significantly disrupt the funding available for vital programs and services that serve the community. Consequently, fluctuations in these revenues may have extensive implications for the City’s capacity to support its residents and maintain essential services.
Sales Taxes
The principal source of revenue for the City's General Fund originates from the State, with remittances occurring monthly. The sales tax rate in Hercules is currently at 9.25%, which applies to all retail sales. During the first quarter, revenues have increased by 2% compared to the same quarter of the previous year. It is significant to note that this revenue stream is highly concentrated among a limited number of major operators, with over 70% of the City's sales tax generated by its top three contributors. As of September 30, 2025, the City has collected $1.5 million, accounting for 25% of its annual budget, putting it on track with the estimates.
The chart below illustrates the sources of the City’s sales revenues by industry group, comparing them to the same quarter in previous years.
Annual Per Capita Sales Tax
Utility Users Tax
The City has established a Utility Users Tax (UUT) that applies to the consumption of various utility services, including electricity, gas, water, sewer, telephone, sanitation, and cable television, among others. The current tax rate is set at 8%, following the approval of Measure N by voters in November 2022, which also extended the tax's sunset provision. The City holds the responsibility for determining the tax rate and for specifying the allocation of the revenue generated. As of September 30, 2025, $1.1 million has been collected, representing 26% of the estimated revenues. This amount indicates that the revenue collection is proceeding in accordance with the initial projections.
Property Tax & Vehicle License Fee (VLF)
The City receives property tax and VLF payments between December and April; therefore, as of this date, no property tax revenues have been allocated from the County. Historically, the City has exhibited stable growth in property tax and VLF revenue, a trend that is well-supported by data from previous years. Furthermore, the current assessment conducted by the County Assessor's Office indicates a favorable outlook for ongoing revenue growth.
Business License Fee
Most businesses operating within the City limits are required to pay their business license tax annually, with the payment due on January 1st and expiring on December 31st. In the City of Hercules, the business license tax is similarly due and payable on January 1st. Should the tax not be paid by January 31st, it shall be considered delinquent, and penalties may be assessed accordingly.
For businesses located outside the City of Hercules and holding a state contractor's license, quarterly payments are available. These payments are due on the first day of January, April, July, and October each year. As such, the revenue collected as of September 30, 2025, is derived from contractors who have elected to remit their business license fees every quarter. It should be noted that the majority of revenue will be accumulated starting in January.
Real Property Transfer Tax
The County Recorder's Office mainly collects the real property transfer tax when property transfer documents, such as deeds, are recorded. This process is typically part of the closing phase of a real estate transaction (escrow) and is considered a one-time, transactional event. The tax is assessed only once, at the time of the property's sale or ownership transfer and is paid when the deed or other legal documents are recorded, usually during closing. As a result, this revenue can vary each year based on the volume of property sales.
In the City of Hercules, the real property transfer tax rate is a combined total of $1.10 per $1,000 of property value. This total includes a city rate of $0.55 and a county rate of $0.55. As of September, the revenue collected from the real property transfer tax totaled $38,522, representing 25% of the estimated total and indicating that we are on track for the year.
Franchise Fees
City franchise fee revenue is an essential payment that utility companies make to local governments in exchange for the right to use public property, such as roads and easements. Franchise agreements between the City and the utility companies explicitly delineate the conditions under which these utilities may operate within the City. Typically, the franchise fee is calculated as a percentage of the utility's gross revenue generated from customers located within the City limits. This revenue is subsequently allocated to the City's general fund, which supports vital ongoing operations.
As of September 30, 2025, the total revenue collected reached $218,777, accounting for 16% of the budget estimate. The observed variance is primarily due to PG&E remitting its Utility User Tax (UUT) payment in March each year.
Transient Occupancy Tax (TOT)
The City of Hercules enforces a Transient Occupancy Tax (TOT) set at 10% of the rental charges for guests utilizing hotels and comparable lodging facilities. This tax is applicable to stays of 30 consecutive calendar days or less. A significant portion of the revenue derived from this tax is generated through Airbnb and other short-term rental operations. Additionally, as stipulated in the Development Agreement, Hercules Self-Storage Management LLC is obligated to remit 10% of its rental income to the City in lieu of the TOT. This revenue stream is instrumental in supporting local services and infrastructure, reflecting the community's dedication to upholding a high quality of life for both residents and visitors.
As of September 30, 2025, the City has collected $57,701, which represents 24% of the estimated revenue.
Program Revenues/User Fees
The City of Hercules generates program revenues and user fees from various sources related to services provided to residents and businesses. A detailed Master Fee Schedule for the Fiscal Year 2025-26, effective September 23, 2025, is available on the Finance Department's webpage for reference. This schedule outlines the fees for different programs offered to the community, ensuring transparency and clarity regarding the costs associated with these services.
As of September 30, 2025, the revenue collected from programs totaled $516,264, representing 25% of the estimated revenue. This amount indicates that the city is in line with its financial projections.
Use of Money & Property
The use of money and property pertains to the revenue generated by a government entity through its investments, rental income, and other operations involving its assets. As of September 30, 2025, the City's earnings from investments and rental income amounted to $318,880, which represents 26% of the estimated revenue. This indicates that the City is on track with its projections.
Administrative Cost Allocation
Administrative cost allocation is the process of distributing shared administrative expenses—such as rent, utilities, and salaries for support staff—across various products, services, or departments. This process ensures that each part of an organization fairly shares these overhead costs by using a logical and consistent method, such as headcount, square footage, or a percentage of direct costs. Proper allocation provides accurate financial reporting and aids in strategic decision-making, grant compliance, and resource management.
Miscellaneous Revenues
Miscellaneous revenues encompass a variety of financial inflows that include funds collected from different government agencies, as well as penalties imposed through fines and property forfeitures.
General Fund - Expenditure Analysis
Operating expenses, organized by department, are currently tracked at approximately 26% of the annual budget through September 30, 2025. It is noteworthy that expenditures on workers’ compensation and general liability insurance are fully paid at the beginning of the fiscal year. This results in the first quarter exceeding its budgetary appropriation.
At this early stage, there is not enough information to determine whether expenditures will significantly deviate from the budget, given the timing of these expenses. Nevertheless, based on the current expenditure rate, it is in line with initial estimates. A comprehensive review of the budget will be conducted at mid-year, specifically as of December 31, and any necessary adjustments will be prepared based on that analysis.
SEWER ENTERPRISE FUND
A sewer enterprise fund is a self-sustaining governmental fund that plays a crucial role in managing the financial aspects of a City's sewer system. This fund is primarily supported by user fees, including service charges and connection fees, which are specifically designed to cover the various costs associated with the sewer service. These fees are essential, as they are earmarked exclusively for the operation, maintenance, and future expansion of the sewer infrastructure, ensuring that the financial burden falls on those who utilize the service rather than on taxpayers.
Operating much like a private business, the sewer enterprise fund utilizes accrual-based accounting practices to track its financial health meticulously. This approach allows for a clear and comprehensive understanding of the fund's financial activities, separating its operations from the City's general fund. By maintaining this financial independence, the fund ensures the efficient and effective management of the City's sewer system, ultimately contributing to the public health and environmental sustainability of the community.
Sewer fees, similar to property taxes, are assessed annually and included in the property tax roll. The City receives these funds from the county in December. As a result, no revenue has been received for this period so far. However, the fund currently has a sufficient cash balance to support its operations until the revenues are received.
SPECIAL REVENUE FUNDS
Special Revenue funds are specialized accounts established to manage financial resources earmarked for specific purposes, as dictated by legal requirements or various restrictions, including local ordinances, state or federal regulations, or detailed grant agreements. These funds operate under a stringent framework that necessitates the careful tracking of revenue and expenditures separately from the general fund and any other fiscal accounts. This separation is crucial to ensure that financial resources are used exclusively for their intended purposes, thereby fostering a culture of accountability and transparency.
For example, Special Revenue funds may be created to support essential initiatives, such as road maintenance, by drawing on dedicated sources, such as state gas taxes. Additionally, these funds can finance grants or local assessments for specific community projects and maintenance, such as park development or stormwater management systems and landscaping and lighting maintenance, ensuring that local needs are effectively addressed and that funds are allocated responsibly in service of the community. Revenues from the Landscaping and Lighting Assessment District (LLAD) are incorporated into property taxes. The assessment fees are collected during the period from December to April; therefore, no LLAD assessment fees have been received to date this year. Nonetheless, there are adequate funds in the cash reserve to finance ongoing projects or programs until the revenues are collected.
CAPITAL PROJECT FUNDS
City capital project funds are specialized accounts designated for the acquisition, construction, or enhancement of vital city assets, including critical infrastructure and public facilities. These initiatives typically involve extensive planning and execution over multiple years, reflecting the City’s commitment to sustainable growth and development.
The funding for these significant projects is sourced from a variety of channels, including general revenue—which represents cash readily available for use—debt financing through instruments such as bonds, and grants that help offset costs. Each source of funding comes with specific regulations that dictate its appropriate use, ensuring transparency and accountability in municipal spending.
Projects undertaken with these funds are strategically prioritized based on the city’s overarching goals and community needs. They can encompass a wide array of developments, from constructing and repairing roads and sewer systems to creating vibrant parks and building essential public structures. Each project contributes to enhancing the quality of life for residents, promoting safety, accessibility, and civic pride within the community.
As of September 30, 2025, active projects have incurred an aggregate expense of $3.7 million, as illustrated in attachment 4. There is adequate funding available to complete these projects.
DEBT SERVICE FUNDS
Debt service funds are specialized accounts established to meticulously manage and fulfill the City’s long-term debt obligations, such as those arising from bond issuances. These funds accumulate resources from diverse sources, including property taxes, user fees, and transfers from other financial accounts, thereby creating a reliable pool of funds to make timely and consistent payments to bondholders. The primary objective of these funds is to ensure that all debt commitments are honored in full and on schedule, thus maintaining the City's financial integrity. By keeping these funds distinct from the general operating budget, municipal authorities can prioritize debt obligations effectively.
INTERNAL SERVICE FUNDS
Municipal governments establish internal service funds to efficiently manage and account for the costs associated with delivering essential services, including information technology operations, fleet management, and facility maintenance. These services are provided to various departments on a cost-reimbursement basis, thereby enhancing accountability and transparency.
Operating like a business, these funds use accrual accounting to accurately track both revenues and expenses. This methodology ensures that each service remains self-sustaining while providing clarity on the comprehensive costs of delivering it. By adopting this model, municipalities can optimize the management of shared resources, improving efficiency and enhancing coordination of centralized operations across the municipal framework.
As of September 30, 2025, the Internal Service Funds reported a balance of $1.5 million. This amount highlights the financial stability and resource availability required to support our operational services and future replacement needs effectively.
AGENCY FUNDS
The Agency Funds group includes the assessment district bond that is not obligations of the City and a trust fund established for the Other Post-Employment Benefits (OPEB).
SUCCESSOR AGENCY
A Successor Agency is a formally established entity in California responsible for managing the dissolution process of former redevelopment agencies. After the state's decision to dissolve all redevelopment agencies in 2012, these Successor Agencies have become essential in overseeing the settlement of existing debts and contractual obligations, as well as the efficient disposal of the former agency's assets. Each agency operates under the supervision of an Oversight Board, which ensures transparency and accountability throughout the winding-down process.
Importantly, the Successor Agency is a separate entity from the City. Successor Agency accounting occurs through separate trust funds that record tax increment revenues and payments for items approved by the Oversight Board in the Required Obligation Payment Schedule (ROPS).
FISCAL IMPACT:
The first-quarter report for FY 2025-26 presents an analysis of variances between budgeted and actual revenues and expenditures. This document serves an informational purpose only and does not have any financial implications.
ATTACHMENTS:
General Fund Year-To-date Revenue Report through September 30, 2025 General Fund Year-To-date Expenditure Report through September 30, 2025 All Funds Year-to-date Revenues and Expenditures Report through September 30, 2025 Active Capital Projects report through September 30, 2025 2