SAN FRANCISCO — Hercules, Calif., is dealing with a fiscal and political mess that will require an effort worthy of its name to right its finances and pay debt service on $162 million of bonds.

The Bay Area city’s general fund is facing a $6 million shortfall out of an $18 million budget for fiscal 2012, while $5 million in unfunded debt obligations linked to the fund are coming due this year, according to a report prepared for the city by consultants Municipal Resource Group of Danville.

The Hercules Redevelopment Agency is basically insolvent and will be unable to make $1.4 million in debt service payments without help from the city’s general fund, said the MRG report, which was released last week.

Overall, the  HRA and the Hercules Public Financing Authority have more than $162 million of outstanding debt, which does not include assessment districts, the report said.

The city’s general fund, HRA, utilities fund, and sewer fund are on the hook for $12 million in annual principal and interest payments.

The report said the Redevelopment Agency’s assessed valuations and tax increment revenues have fallen by 25% over the past three years.

Last year, Standard & Poor’s downgraded the HRA’s 2005 and 2007 tax allocation bonds to BB from A because of a decline in tax increment revenues.

The city’s utility is also facing ongoing deficits if it doesn’t raise rates, the MRG report said.

Hercules, which has a population of around 26,000, sits on the northeast shore of San Francisco Bay, just a few miles south of the currently bankrupt city of Vallejo.

Mike Oliver, a consultant with Municipal Resource Group, said if Hercules does not deal with the budget problems this fiscal year, it will be unable to fund services.

“You can write the check, but it just won’t clear,” Oliver told the City Council during a meeting last week. “There is nobody left to borrow the money from.”

MRG has recommended that the city cut its general fund expenses to $12 million, including $1.5 million to cover the Redevelopment Agency debt service, for the upcoming fiscal year.

To get there, the consultants said the city must use one-time funds as a buffer, slash overhead and operating costs, and outsource services to other agencies.

The consultants will be releasing a final report this week.

“Right now, we are taking those secondary steps of reducing costs internally as well as looking at employee layoffs,” said Michelle Harrington, a spokeswoman for Hercules.

Harrington said the city is looking at a $10.5 million budget for the next fiscal year and to pay the $1.5 million debt service owed by the Redevelopment Agency.

Even though bankruptcy has been discussed, Harrington said the consultants have recommended against it.

Like its finances, the city’s politics are also in chaos.

Two council members, Mayor Joanne Ward and Donald Kuehne, are facing a recall drive by residents due to the fiscal problems and concerns about their dealings with the city manager. One council member has already resigned.

While the former city manager Nelson Oliva was out on sick leave, interim city manager Charlie Long uncovered the dire financials, made structural changes, and hired a new finance director.

Then the City Council fired Long and put Oliva back in his position until he retired at the end of the year.

Now the city’s police chief, Fred ­Deltorchio, has taken over the job of city manager.

Hercules paid its city manager $268,305 in 2009, according a salary database maintained by the California controller’s office.

The city’s fiscal 2010 certified audited financial report is due within weeks. Its auditor for the last several years has been Moss, Levy & Hartzheim.

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