Consultant to Hercules: Slash Budget to Avoid Red Ink

Consultants recommend the city of Hercules reduce its budget for basic services by a third to reverse a mounting deficit that threatens to sink the city $33 million in the hole over the next five years if nothing is done.

This fiscal year alone, ending June 30, Municipal Resource Group is predicting the city’s general fund, which pays for services like police and public works, will spend $5.7 million more than it takes in. (Click on the graphic to the right to read the report.)

To get a handle on spending, the consultants recommend the city focus on trimming its budget for basic services to just $12 million. This city of 25,000 currently spends about $18 million a year on basic services, about $11 million in salaries and benefits alone.

An overflow crowd packed into City Hall on Tuesday to hear from the consultants, who were paid $140,000 for the analysis of the city’s finances. It was a rowdy evening punctuated with cheers and booing.

“I’m kind of stuck in shock and awe right now,” said Hercules resident Chris Tallerico. “This is a total disaster.”

Phil Simmons, who is one of the residents leading Don Kuehne and Joanne Ward, wanted to know where all the money went.

“It sounded like all of the sudden in 2010, a bunch of redevelopment money went missing,” he said. “What did we buy with all that money?”

Once a source of revenue to the city’s general fund, to the point of insolvency. The city, the Redevelopment Agency and the Public Finance Authority together have more than $162 million in bond debt with $12 million in annual principal and interest payments, the consultants said.

The debt is paid by the general fund, the redevelopment agency, the city’s utility district and the sewer fund, one of the only city funds mentioned Tuesday night that remains in the black.

All of the bond money has been spent, including some $50 million on vacant land, and the redevelopment agency is now facing a budget shortfall approaching $18 million, the consultants said.

“The money didn’t disappear,” said Don Fraser, who offered an analysis of the redevelopment agency.

Redevelopment money comes from tax increment, which is the appreciated property tax revenue realized on areas placed into redevelopment, and Fraser pointed out that assessed values in Hercules have declined 25 percent over the past three years.

“Had projects been stopped last year, bond proceeds could have been used to pay down debt service, but that didn’t happen,” Fraser said.

Moreover, many key projects like Sycamore North or the Wal-Mart site, which the agency purchased for almost $14 million, remain half-finished or vacant.

“I would suggest that you buy a calculator,” resident Margie Liberty told the council to a roll of laughter. “This is a circus, and it is so sad we are all impacted to this degree.”

The redevelopment agency opened the fiscal year last July more than $12 million in the red, the report indicates.

Given the dire outlook for the agency, Councilman John Delgado questioned its continuing existence. He asked to have the matter placed on an upcoming meeting agenda, pointing out that the council members, who also sit as the redevelopment agency, are paid $50 per meeting. A drop in the bucket, perhaps, but nonetheless significant when it comes to operating in the red.

A draft report from Municipal Resource Group with specific recommendations for cuts is expected to be delivered to the city Wednesday and made public in its final form within the week. But the consultants did suggest that the city “divest” itself of the Municipal Utility District, which is buying wholesale electricity and selling it to parts of the city at a loss of approximately $600,000 a year, the consultants reported.

The utility is expected to end the fiscal year with a little more than $2 million, thanks in part to a $5 million cash infusion that came from bond proceeds, consultants said.

“If I understand correctly, the $5.4 million was taken from bond proceeds to make it (the utility) look good to get another bond,” Councilman Delgado asked.

“Yes,” Joan Drayton of the consultancy replied.

The long-range plan for the utility district included a growing customer base that has not materialized. The city voted earlier this month to scrap plans for building a substation, canceling orders for transformers and breakers at a negotiated kill fee of more than $300,000.

No other certain cuts were identified Tuesday night, but given its obligations to bond holders and a declining tax base, it is difficult to imagine how the city will be able to keep services and staffing intact.

One resident asked if the city was considering bankruptcy and what, if anything, would happen should Hercules be forced to default on its bond debt.

Tom Sinclair, one of the consultants, urged against going down that path, saying it would destroy the city’s reputation. Sinclair served in 2003-04 as a finance director in Vallejo, which declared bankruptcy in 2008, and he reminded residents that the decision ultimately cost that city $9.3 million in attorney’s fees.

“Before you think about defaulting on bonds, think seriously about what it will say about your community,” he said.