Hercules has arrived at financial crossroads where bond debt and various city loans have so far outpaced revenue that it will be a challenge in the coming years to provide residents with basic city services, an outside review of the city’s finances has revealed.
To taxpayers who have seen and cut in half in recent weeks, this is no revelation. Key city functions like the annual Christmas tree lighting and other have been canceled, and the city’s Parks and Recreation Department programs will likely shrink.
But the emerging picture detailed in a 107-page report by Municipal Resource Group of Danville reveals that the city’s immediate cash shortfalls could well pale in comparison to its , much of which has been backed through various cooperation agreements by the city’s general fund, which is expected to amount to just $12 million next year.
Overspending and lax oversight by the City Council has essentially leveraged the city’s general fund to the extent that its debt and loan obligations will soon outpace spending for basic city services such as police, public works and parks.
Such services are the ordinary backbone of any city’s general fund, but the report points out that in Hercules, the general fund has essentially functioned as a checking account for the city, with so many transfers in and out that the reviewers found it challenging to “understand the transactions and the condition of any individual fund.”
The report notes that the general fund has been a money source “of last resort” for long-term debt and even state housing loans totaling more than $6 million, $4.3 million of which are due in the coming fiscal year, which begins July 1.
The Redevelopment Agency, along with its affordable housing fund, has in recent years issued $142.9 million worth of bonds.
“Over the five-year period of the model developed for this analysis, the General Fund is directly obligated for the repayment of $10.2 million in debt service,” the report said.
That’s almost the same amount the city has spent in recent years on the essential staff to keep its basic services operating. Almost one of every five dollars spent by the city’s general fund is going toward its debt service, said reviewers, who were paid $140,000 for their report.
The idea was that some of these bonds would be repaid with all the new taxes collected in the city’s redevelopment areas, but many of those new projects are today nothing more than and .
The Redevlopment Agency, which is essentially governed by the City Council presiding over another arm of government, is $18 million in the hole, and the housing fund is short by over $3.7 million.
“At the time the bonds were issued, the Agency had sufficient non-housing tax increment revenue to support this debt," the report said. "However, since that time, assessed values and tax increment revenues have dropped by a significant amount. As previously stated, the Agency did not react to the problem, and continued to spend bond proceeds instead of considering that some of the bond proceeds could have been used to refund a portion of the outstanding bonds, which could have reduced the debt burden on the Agency."
Tax revenues alone will not be enough to pay even the annual debt service on the bonds, let alone principal, and the report says the shortfall for the fiscal year ending June 30 will be $1.4 million.
The city’s , which buys wholesale power and re-sells it to some 800 residential and commercial customers, has also been subsidized by the general fund. The city’s Public Finance Authority issued more than $13 million worth of bonds for the emerging utility last year, part of which were supposed to help for a substation that has recently been .
Thanks to cooperation agreements in last year’s utility district bond issues, the city’s general fund could also be on the hook for debt service on those bonds. Should the utility district be unable to meet those bond payments, the city’s taxpayers would be obligated to pay $746,413 next year and more than $900,000 in subsequent years, the report said.
“The (Hercules Municipal Utility) does not generate sufficient net revenue to cover its ongoing operational costs and debt service, nor cover requirements for any major capital repair or replacement,” it said.
What impact the MRG review will have on the price and ratings of Hercules’ outstanding bonds is uncertain. Although there has been limited trading in municipal utility bonds to date – with the most recent sale of bonds maturing in 2017 being last week at $12 below the initial offering price, some of the city’s 2005 and 2007 RDA bonds were selling last week at half their initial offering price.