City of Scottsdale budget woes begin to percolate

A view of a flag signifying the city of Scottsdale at the Scottsdale City Hall complex in downtown Scottsdale (Independent Newsmedia/Melissa Fittro)

The city of Scottsdale has an unsustainable budget.

City leaders gathered Tuesday, Jan. 31 at City Hall to get the first blush of what revenues are available for day-to-day operations within the municipality.

The Scottsdale General Fund, which provides for day-to-day operations of the city, is $278.3 million for fiscal year 2016-17 with 47 percent of those funds derived from local sales taxes whereas property tax levies, state-shared revenues and charges for services account for the majority of local funds.

David Smith

“Your opening comments were that we don’t have enough revenues to cover the operations of the city,” said Scottsdale Councilman David Smith at the Jan. 31 work session of Scottsdale Budget Director Judy Doyle introductory comments.

“And, I would agree with you. What kind of tax program is needed to restore the fiscal stability to our comprehensive budget?”

Ms. Doyle told Scottsdale City Council the municipality still does not have enough revenues to meet all of the needs and priorities of the city.

“The decisions to make allocations can be difficult but the process doesn’t have to be,” she told council. “Tonight we are looking for direction on the operating budget parameters.”

A looming liability of unpaid public safety pensions and infrastructure maintenance costs appear to be an emerging budgetary issue.

“We will not have enough revenue to meet the needs and priorities of this city,” Ms. Doyle said. “As you know the budget development process can be fluid. The largest two revenue sources you have control over are sales tax and property tax.”

Downward trends

While Scottsdale is anticipated to accumulate $120.7 million in local sales tax remits, Ms. Doyle pointed to areas of sales tax trickling downward.

Ms. Doyle points out the automotive sector in Scottsdale is kicking in $700,000 fewer dollars to local coffers, estimates show.

“A car dealership closed in October and additional car dealer closures are expected mid-summer due to the new Salt River Auto Mall,” she said. “This was something we had assumed and included about a $1 million decrease in this category for ‘17-’18 when we adopted the ‘16-’17 budget.”

While construction sales tax is expected to decrease or remain flat in upcoming years hotel lodging remits seem to be on the upward trend.

Of the $400,000 up tick to the forecast $7 million for lodging, $165,000 of those dollars came from short-term rental taxes assessed through companies like Airbnb.

“This tax did not go into effect until this month. It could be more, it could be less that is something that we will continue to monitor,” Ms. Doyle said of the short-term rental tax remits. “We included an additional $165,000 in sales tax from short-term rentals.”

Ms. Doyle points out the city is anticipating a decrease of $100,000 in state-shared revenues while new Arizona Department of Revenue guidelines no longer allow cities to collect their local sales taxes.

“We are hopeful that it is just timing and ultimately not effect our collections, but this is also something we will continue to monitor, (Department of Revenue) tax collection,” she said. “We kept construction flat over the next five years because we just don’t know the potential for legislation.”

Public safety pension

Municipalities throughout the country have for a long time provided pensions to their public safety personnel.

Pensions were meant to attract quality workers and the promise to provide that pension when a worker retired served to reward employees for years of service to the public. But many cities and towns are now struggling to fund and maintain those pensions.

The city of Scottsdale is no exception.

The Scottsdale Police Department is carrying a $122.4 million liability of which 55 percent is funded, according to Ms. Doyle.

“We do recognize that when retirements do occur that funding will drop and that unfunded liability will grow,” she explained to council.

The Arizona Public Safety Personnel Retirement System is a 236-member organization managing the pension plans for eligible public safety personnel entities statewide.

The Arizona Constitution recognizes public employee pensions, while PSPRS and its duties were established in the late 1960s to ensure public safety employees equal footing in terms of pension eligibility, contribution rates and benefit formulas.

One common misperception, PSPRS officials contend, is that the fund determines the level of pension payments to retired police officers, highway patrol, firefighters and other public employees. These payments are determined by years of service and salary levels set by municipal, county or state governments.

PSPRS invests cash set aside by these governments to maximize returns for beneficiaries and help offset public expenses associated with providing retirement benefits.

At the close of fiscal year ‘15-’16, only 39 of the 236 public safety entities participating in the pension program have pension plans that are 100 percent funded. In total, the pension account itself is funded at 57 percent of its total liability, numbers show.

Conversely the Scottsdale Fire Department pension fund is totally funded at 107 percent.

“We will absolutely come forward with a balanced budget but that will be dependent on what priorities are included and are not included,” Ms. Doyle said.

To tax or not to tax?

The Scottsdale budget office asked members of council for a proverbial head nod on several items meant to define city council priorities moving into the new fiscal year that would begin Saturday, July 1, 2017.

Those questions were:

  • Do you support a sales tax change?
  • Do you support instituting the 2 percent secondary property tax allowance this fiscal year”
  • Do you support recouping the 2 percent secondary property tax allowance for the previous six fiscal years?
  • Do you support property tax tort recovery?
  • Do you support a 3 percent pay-for-performance increase for city employees and a 5 percent step program for police officers, fire fighters, fire engineers and fire captains?
  • Do you support an employee compensation study?
  • Do you support a change to the capital improvement plan contribution level?

While each member of city council chimed in on each topic, it appears the only consensus on Jan. 31 was support for compensation increases for city employees including public safety professionals.

“I have no desire to consider a sales tax increase, myself,” said Mayor Jim Lane at the onset of the council discussion. “Property tax allowance is always a cause of consternation here. For right now, I would say lets stay down pat on that for now.”

Jim Lane

But Mayor Lane was hesitant to put any decision into motion at the study session discussion.

“The other side of it is some of these things, on a priority basis, is that some of these things have to be tended to,” he said of infrastructure needs coupled with council priorities.

“On general, overall, I am in agreement. I think it is something we need to have communications on as we do not have prospect for a balanced budget given the commitments we have made on salary.”

Councilman Smith has a bit of a different perspective.

“When we as a council, decided to waive this allowance, we are gratuitously giving a tax benefit to business and the wealthy and that is not where I am coming from during this time of economic difficulty and distress,” he said of his support for pursuing the 2 percent secondary property tax assessment.

“I would rather give tax relief to the people who actually need relief in any form it may come.”

Councilman Smith has been a champion of removing a sales tax on food within Scottsdale city limits.
Scottsdale City Council Tuesday on Jan. 26, 2016, voted 5-2 to take 1.1 percent of the 1.65 percent retail sales tax assessed on all grocery sales within city limits — a total of about 7.8 million this fiscal year — and funnel those dollars into the capital improvements budget forecast.

Since 2004 the city of Scottsdale has been assessing a 1.65 percent sales tax on all grocery goods sold within city limits, but a tax on food was first assessed in 1958 through ordinance 50, city officials say. Until earlier this year, 1.1 percent was dedicated toward the General Fund while the remainder was divided into the city’s transportation and Preserve funds, city leaders say.

“We want our cake and we eat it too,” said Councilwoman Virginia Korte at the study session discussion.

Virginia Korte

“My concern with eliminating the food tax is we don’t have enough revenues to cover expenses anyway. I believe we need to think a lot more holistically about the budget. We know that our costs have gone up. We know that we have wage increase commitments and we don’t have many sources of income.”

Councilman Guy Phillips offered an increase to sales tax to recoup lost funds from taxes on groceries.

“If you don’t have the stomach for the food tax then let’s raise the sales tax to cover that because we need that money,” he said. “No one lost a house to sales tax — it’s due to property tax.”

Councilwoman Suzanne Klapp points out no final decisions are being made.

“Nothing we say today is cast in concrete,” she pointed out.

“At this point I am not in support of a sales tax increase. But we need to plan for this. We have planned for this and next year to move the tax on food out of the general budget and into the CIP. I would like to say by 2020 we don’t have a food tax. Something just philosophically doesn’t feel right using food tax to pay for our CIP.”

Scottsdale City Council is expected Tuesday, Feb. 21 to once again tackle budget items specific to employee medical benefits and the possibility of rate and fee changes citywide, a city staff report states.

Northeast Valley Managing Editor Terrance Thornton can be contacted at tthornton@newszap.com

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