Phoenix faces prospect of another budget deficit

September 6, 2014
The Arizona Republic
Dustin Gardiner

The tough financial times at Phoenix City Hall could be far from over.

As city officials aim to avoid a repeat of the budget crisis this past spring, some leaders worry that slow sales-tax revenue growth could create a similar deficit hurdle early next year.

It was only two months ago that Phoenix City Council members adopted a budget that cut employee compensation and raised taxes and fees to fix a nearly $38 million shortfall.

Now, city leaders are looking ahead to the next fiscal year with caution. Early projections forecast that the city could face a $14 million to $54 million shortfall, and they once again could look to raise revenues or cut services to residents.

The crucial factor to watch will be the city's sales-tax revenue growth, which the city depends on to pay for everyday expenses such as police officers and firefighters. Some leaders already are concerned given the state's sluggish returns and poor growth in the fiscal year that ended June 30.

"We had kind of put all our eggs into the '2015 is going to be a great year' basket," Councilman Jim Waring said. "It's not shaping up like a great year that I see. I'm concerned and I think everybody else should be, too."

Phoenix brought in more money last year, but its revenues were far below budget projections and expenses have been rising more quickly, primarily because of soaring employee costs and long-overdue equipment and facilities upgrades.

The city ended the last budget with about $25 million less in new revenues than expected. Its budget predicted a 7.3 percent growth in returns over last year, but actual growth was only 4.6 percent, including revenue lost after city leaders volunteered to reduce the sales tax on food.

Revenues coming into the state's coffers have been sluggish, especially in recent months, leading city officials to speculate that Phoenix could still face a "softening" economic recovery that will hamper returns.

Budget and Research Director Mario Paniagua said the city hasn't finished compiling its July revenue numbers, although he said the city's experience could mirror the state's disappointing collections. He said the city is closely watching its numbers and being vigilant to limit spending.

Another key factor that will shape the city's deficit picture heading into the spring: pension costs. Phoenix won't know how much its employee-pension bill will increase until late in the fall; it rose by $18 million this year.

"It's definitely something we have to keep a close eye on," Paniagua said of the deficit picture. "We're really anxious to see those pension costs, of course."

The city has taken steps to help keep it in the black. Its employee-union contracts include an additional compensation cut next year worth $9.5 million, and about $11 million in new taxes and fees will continue going forward.

Paniagua said the city also is preparing by finding efficiencies and potential fee increases to help recover the cost of delivering services used by only a segment of the population. Assistant City Manager Milton Dohoney is leading an organizational review that city leaders hope will find millions in savings.

Waring and some other council members have raised concerns about attempts to raise user fees. Councilman Sal DiCiccio said the city will bring in more money next year but will try to raise fees because it's unwilling to live within its means.

"Everything is going to have an extra fee," DiCiccio said. "They're essentially going to nickel-and-dime the public."

Councilman Daniel Valenzuela has been traveling to Washington, D.C., to lobby for grants to support public-safety jobs and transportation projects. He's also working with private entities, including Grand Canyon University, to build partnerships to help support city services.

"We're not doing business as usual and that's why I'm optimistic," Valenzuela said of the projected shortfall. "What's important here is that we are starting this process immediately."

Phoenix tax growth sluggish

Phoenix's budget is heavily reliant on sales-tax revenue to support basic services, such as police, fire and parks. Part of the reason the city faced a nearly $38 million shortfall this fiscal year is because tax collections last year were far below projections. While the city brought in more money overall, its revenues have lagged in some areas. Here's a breakdown of sales-tax growth by category for the fiscal year that ran July 1, 2013-June 30, 2014.

Up: Retail.

$152.5 million.

Taxes from sales at retail stores and malls grew a modest 5.2 percent. Internet sales have hampered local retailers as more consumers increasingly shop online for items like clothing, movies and music.

Down: Telecommunications.

$20.5 million.

Taxes from telephone use fell a sharp 7.2 percent as more consumers use data- and Internet-based mobile services to communicate. Unlike landline or cellphone use, data cannot be taxed.

Up: Contracting.

$17.3 million.

Taxes from the construction business increased 12.9 percent, the city's single highest tax-growth area. Construction activity was highest at the start of the fiscal year, as the real-estate market continued to rebound. Contracting tapered off later in the year.

Up: Restaurants and bars.

$20.6 million.

Taxes from restaurants and bars increased 6.7 percent. As the economy has improved and unemployment decreased, people are spending more money dining out.

Up: Hotel/motel.

$8.3 million.

Taxes paid by hotel and motel guests have increased sharply, 8.9 percent. The state attracted a record 39 million visitors in 2013.

Down: Commercial property rentals.

$35.9 million.

Taxes from commercial property rentals for offices and businesses fell 3.6 percent. The drop comes after state lawmakers created a sales-tax exemption for some leases.

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