Scottsdale budget cost-to-revenue ratio exceeds sustainability

A view of Scottsdale City Hall, 3939 N. Drinkwater Blvd. (file photo)

Scottsdale City Council is expected to approve a nearly $1.3 billion fiscal year 2017-18 budget in late June.

But members of Scottsdale City Council say it appears the municipal financial forecast for the next five years shows the city is likely to face a budget shortfall unless savings are annually used to cover expenses.

Scottsdale City Council April 25 held a public hearing on the proposed budget at City Hall, 3939 N. Drinkwater Blvd.

Scottsdale Budget Director Judy Doyle led the hours-long discussion that focused on both the city’s proposed fiscal year 2017-18 operating and capital budget as well as a five year financial forecast.

“We focus on the General Fund because this is the city’s only fund that is not restricted for a specific purpose,” she said of the dollars and cents that provide for the day-to-day operations of the municipality. “We are forecasting our total sources close to a 2.5 percent annual increases in years two through five.”

While revenues are expected to hit peak levels over the next five years, so are costs, and city leaders are acknowledging that both a bond program and new property tax levies may be pursued to help make municipal ends meet.

“Our largest revenue source, our city sales tax, we are forecasting a 3 percent increase in those years,” Ms. Doyle pointed out.

The city of Scottsdale proposed fiscal year 2017-18 General Fund sits at $264.9 million, which provides for the day-to-day operations of the city, while the proposed all-funds budget can be broken down to:

  • Operating budgets: $557 million.
  • Grants and special districts: $15.3 million.
  • Capital Project Budget: $511 million.
  • Reserves: $172.4 million.

“Total uses are ranging from flat to a 2 percent increase per year,” Ms. Doyle said of projected costs over the next five years. “Our uses exceed our sources.”

The fiscal year 2017-18 balanced budget appears to be contingent upon a $9 million transfer in from the previous year’s savings.

Ms. Doyle does point out, however, the city is including about $18 million in one-time expenditures including payouts to retired public safety personnel in the upcoming fiscal year.

“If you back those one-time items out and look at our ongoing sources versus ongoing uses we are balanced for ‘17-’18,” she said. “I will say in ‘18-’19, ‘19-’20 and ‘20-’21 we are not balanced. Our ongoing sources to not meet or exceed our uses. Over that three-year period it is about $8 million dollars.”

Ms. Doyle says financial hurdles are coming down the pike.

“We know this will be something that we will need to address whether it be a strategy to increase sources,” she said. “We can assure you that we will not be bringing a budget in ‘18-’19 that will not be balanced.”

 Public Safety Personnel Retirement System costs are playing an underlying role in why the city of Scottsdale is seeing record costs as revenues are at an all-time high. (File photo)

General Fund increases

Major General Fund increases playing a role in the municipality’s budget sustainability is a recent court ruling regarding forgone payments that must now be paid through the Public Safety Personnel Retirement System. The city of Scottsdale’s portion to payout for what is known as the “Parker case” is $7 million in the coming fiscal year.

The Scottsdale Police Department is carrying a $122.4 million PSPRS liability of which 55 percent is funded, city officials say.

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.

In addition to Parker case payouts, the city of Scottsdale is seeing notable General Fund increases including:

  • A $3.5 million payment to the PSPRS fund;
  • A $2.1 million increase due to a 3 percent merit pay salary increase for employees;
  • A $1.3 million increase to provide for a police 5 percent salary step program;
  • A $400,000 increase to provide for a 5 percent salary step program for police sergeants;
  • A $800,000 increase to provide for a 5 percent salary step program for fire fighters;
  • A $600,000 increase to employee healthcare costs.

“The proposed budget does not include a CIP contribution on ‘17-’18 beyond the transfers required by our financial policies,” Ms. Doyle said of looming infrastructure concerns.

Scottsdale Councilwoman Virginia Korte says savings accounts are there for a reason.

Virginia Korte

“The proposed budget plan for the next five years uses some unreserved General Fund dollars to balance future operating budgets,” she said in a May 3 statement. “This unreserved fund balance exists for this reason — to cover costs on a one-time basis for lean operating years.”

But as costs continue to rise, Councilwoman Korte says new conversations will be pursued of how the city can raise base revenues.

“Since the Great Recession, when the council reduced the operation budget by $50 million and reduced staffing levels by over 300 employees, we made intentional decisions not to raise property taxes the past five years,” she explained.

“As the council reviews the proposed budget and takes into account additional costs due to inflation and one-time expenses, it is clear to me that balancing the budget without additional revenue resources, while maintaining current services, will be challenging.  It is incumbent upon the council for a discussion regarding either increasing revenue sources or eliminating some services for which our residents have become accustomed.”

Balanced vs sustainable

Scottsdale Councilman David Smith pointed out during the public hearing his concerns of the city using its savings to pay for its day-to-day operations.

“You have assured us we won’t see an unbalanced budget — and I am sure we won’t — but at the same time you want us to earmark $8 million with unreserved fund balance,” he said.

“We are willing to do what you recommend. But I am reluctant to say ‘don’t touch that $8 million,’ because I will come to you with an unbalanced budget. I don’t want to communicate to anybody that we are subscribing to the fact that the losses coming up will somehow be taken care of with our savings account.”

Councilman Smith expressed concern over the city’s overall financial health in years to come as infrastructure needs are rising and costs continue to keep pace with or exceed inflation rates.

“I think the numbers show we have a huge problem,” he said. “We have a huge problem and I don’t know what that solution is going to be.”

Scottsdale Councilwoman Linda Milhaven says she acknowledges challenges are coming, which may lead to an exploration of increasing primary property tax rates and the necessity for a bond program to cover infrastructure costs.

Linda Milhaven

“We certainly have challenges with rising costs, but looking at the department budgets that is not quite clear what those are. I am still piecing things together,” she said in a May 2 phone interview.

“We have rebounded to where we were seven or eight years ago. And, while we may be at an all-time high, but it is a seven year’s ago high,” she explained. “We have kept taxes flat. We really need to look at how do we continue to pay for the increases in costs to maintain the service levels our residents expect.”

Councilwoman Milhaven says the cost of doing business is on the rise in the city of Scottsdale.

“So, yes, for right now, some of the capital improvements and one-time stuff is coming from previous years’ savings,” she said. “There does appear to be that risk that the ongoing costs are going to exceed revenues — we need to find revenue to pay for them.”

Councilwoman Milhaven does say the financial situation at the city of Scottsdale is not all “doom and gloom” as the municipality is OK for today, but rising costs will dictate certain decisions in the future, she says.

“I am confident the budget that will be presented will be good for this year,” she said. “But at some point we are going to have to raise the primary property tax and we are going to have to pass a bond to pay for capital improvements. If costs are going up — and they are — you need to keep pace with that.”

Scottsdale City Council is expected to host a May 23 public hearing on the proposed fiscal year 2017-18 budget at City Hall.

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

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