Scottsdale City Council comes to terms with new financial reality as COVID-19 ravages coffers

Amid pandemic precautions priorities take precedence

There have been 12 recessions since 1937, and while the reason and cause for each one are different, none were related to a pandemic --- none. So no one has ever gone down this road before. We are in uncharted territory, and when faced with uncertainty, I believe flexibility is called for in both directions.”

Scottsdale City Treasurer, Jeff Nichols

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By Melissa Rosequist
Twitter: @mrosequist_

Scottsdale gave unanimous approval to its fiscal year 2020-21 tentative budget after a call for contingency funds be added for community services ranging from rental assistance to adaptive service programing.

The 7-0 Scottsdale City Council vote comes after city staff made changes to the draft budget in about two weeks time, following an initial budget that was called “unrealistic” by the mayor and others, while COVID-19 impacts to the city’s revenue streams are best guesses.

The tentative budget approval was made during a May 19 meeting, where only the City Council and Charter officers were present at City Hall, 3939 N. Drinkwater Blvd. --- all sitting at individual desks appropriately spaced out. This was the first in-person meeting in several weeks.

City Treasurer Jeff Nichols said during the budget presentation that staff heard the concerns voiced by City Council earlier in May, and changes were made to address those.

In addition to approving the tentative budget, the council cast an additional 4-3 vote during the same discussion to give staff direction to not implement a 2% property tax increase. Officials say, however, due to other taxes ending, residents’ total tax rate would have remained flat.

Scottsdale has applied for federal grant funding to assist residents in need of support during the pandemic, and Councilwoman Solange Whitehead called for contingency funds in the budget in the event those funds do not come through.

The total tentative fiscal year 2020-21 budget is approximately $1.5 billion comprised of:

• General Fund: $277.7 million;
• Special Revenue: $46.9 million;
• Debt Service: $122.8 million;
• Enterprise: $121.9 million;
• Net Internal Services: $12.8 million;
• Grants, endowments and special distribution: $12.1 million;
• Capital budget: $690.0 million;
• Contingencies and reserve budget: $250 million.

The contingencies category was outlined prior to calls for added funds to address COVID-19 needs.

Now that City Council has approved the tentative budget, which sets the city’s maximum annual expenditure limit --- the amount of money Scottsdale can legally spend next year --- budget changes can only be made to decrease funds.

The fiscal year 2020-21 budget, as Mr. Nichols points out, has $32.2 million less in total sources and expenses uses than last year’s document.

“Forecasting is very difficult,” Mr. Nichols said. “There have been 12 recessions since 1937, and while the reason and cause for each one are different, none were related to a pandemic --- none. So no one has ever gone down this road before. We are in uncharted territory, and when faced with uncertainty, I believe flexibility is called for in both directions.”

Additionally, Town Manager Jim Thompson said COVID-19 is the only declared emergency Scottsdale has ever had.

City officials agreed to a monthly budget discussion to keep a close eye on the city’s financial situation during this unprecedented time.

“We’ve showed you the 12-month projections on revenues, and obviously if we see changes to those we’ll recommend further changes to the expense side to match that,” Mr. Thompson said.

Mr. Nichols stressed officials need to consider Scottsdale’s economy --- not the county, state, region or national economy.

“They’re not specific to Scottsdale, we have a very specific economy that we’re dealing with,” he said of reading economic forecasts.

Mr. Nichols says the city is seeing a decrease of $31.2 million comprised from revenues down $29.8 million and transfers in down $1.4 million.

Expenditures have been reduced by $18.3 million as well, the city treasurer says.

“When you consider the changes we’ve made to both the fiscal year ‘19-’20 and ‘20-’21 budgets, we have reduced total sources $49 million, and we have reduced total uses by $24.2 million, for a spread of $73.2 million,” Mr. Nichols said.

“We have listened, we have heard you, and we have taken appropriate and realistic action on both sides of the ledger.”

$20 million loss

Scottsdale’s General Fund is largely comprised of sales tax revenue; and the city’s annual influx in tourism is a boon to the city coffer.

Mr. Nichols says estimated sales tax revenue for the upcoming budget has been reduced by $20.9 million --- with estimated hotel and motel revenue to bring in only $4 million in sales tax.

In further estimations, the hospitality industry will be down 75% for July and August. In total, the city projects hospitality to be down 53% for the next year.
Mayor Jim Lane pointed out the decreases projected month by month are accounting for the slow-opening of restaurants and other establishments as the stay-at-home order expired on May 15.

“I consider the month of April the worst month, and now that the governor has lifted the stay-at-home order, I think we’ll probably have two better weeks at the end of May than we had in the beginning of May. My hope is June continues that, and then we’re better in July,” Mr. Nichols said. “You’ll note we’re still down significantly, I mean hotel/motel in July, we reduced our budget 75% and the restaurants by 55% --- so I mean, significant reductions --- they’re not back to where they were before. But hopefully as the psychology wears off on people and they’re a little more trusting of their environments, we see this up-tick.”

The projected revenues for fiscal year 2020-21 --- beginning July 1 --- amount to more than $20 million. The largest loss is projected in August, documents show.

The breakdown of revenue decreases are projected to be:

• Automotive: $1,534,000
• Construction: $2,301,000
• Hospitality: $4,465,00O0
• Major department stores: $1,123,000
• Misc. retail stores: $3,933,000
• Other activity: $2,932,000
• Restaurants: $4,834,000

Food stores and utilities are expected to have a positive increase of $95,000 and $132,000 respectively.

Split vote on a symbolic gesture

Earlier at the May 19 City Council meeting, the group decided not to increase a number of annual rates and fees, and council members felt they should continue that goodwill gesture with a proposed up to 2% primary property tax levy.

Mayor Lane explained during the Great Recession and down economic years, Scottsdale hadn’t taken that increase, and only recently returned to pick up the increased rate.

“Since we’re not raising most of our rates and fees, is this not another appropriate thing to give our property owners on all levels, commercial and residential, some break here?” Mr. Lane asked.

“My suggestion is, we’re talking, I think, in the area of $600,000, but as a show of respect over the impact that this has had on all of our community whether or not that’s something we could remove?”

Councilwoman Suzanne Klapp provided support on that idea as well, calling it a small gesture.

The 2% statutory adjustment --- approximately $600,000 --- is a part of a General Fund-used levy, which is set to increase $1.1 million in total.

Mr. Nichols said, in response to a question raised by Ms. Whitehead, that the rate increase is .0003 cents.

“As we’re trying to be really conservative with funding, and we’re trying to assess the impact of this is not evenly on all residents, so I would say keeping the property taxes even is very good for our residents, and removing $600,000 of funding we might need for those who need rental assistance or for other needs, I think that is a more valuable place,” Ms. Whitehead said, pointing out when taxes are deferred, the end result is a large jolt to property owners later on.

Councilwoman Linda Milhaven didn’t support the direction on the tax levy either.

“Given that the dollar amount folks are going to pay is going to be unchanged, given the changes in rates, given the uncertainty of what we’re facing --- two weeks ago the sky was falling, and we had no way to know what was going [on] and now we’re feeling good about things, which I think is great, but I think we need to maintain maximum flexibility,” Ms. Milhaven said.

“When we’re facing an uncertain future where we may not be able to feed our seniors and provide important services, I think a symbolic gesture is not the right thing to be doing at this time. I would rather maintain maximum flexibility so we can take care of our citizens.”

Ultimately, the split vote was approved 4-3, with councilmembers Whitehead, Milhaven and Virginia Korte dissenting.

Putting priorities over dollars

Councilmembers suggested ideas of moving funds around to provide emergency assistance to community members in need.

Ms. Whitehead garnered her colleagues support in providing contingency funds in the event federal dollars are not provided to Scottsdale.

Maricopa County and Arizona cities with more than 500,000 residents have received federal dollars to assist during COVID-19, but thus far, Scottsdale hasn’t received any money. Officials are hoping that changes, but don’t know when or how much they would get.

“Budget isn’t just about dollars, it’s about priorities,” Ms. Whitehead said. “I’m not 100% there with the budget yet, and I want to make some recommendations that we adjust some of the priorities.”

Ms. Whitehead pointed out programs that feed senior citizens and provide rental assistance are not using taxpayer dollars, they are using gambling proceeds from Salt River Pima-Maricopa Indian Community. Approximately $700,000 was received in grants to pay for those programs.

“As most of you know, these casinos have been closed most of the year --- there was a fire at the one casino, and then COVID --- so we have a lot of uncertainty about whether we’re going to have funds to pay people and rental assistance,” Ms. Whitehead said, pointing out rental assistance prevents homelessness, which costs more money for the city.

Ms. Whitehead also wanted to protect funding for programs, like for children with disabilities.

“There are no other programs for children in high school that have disabilities in the summer. We’ve cut this program because we don’t want to risk these children being sick, but at the same time, just like how Canal Convergence as likely could happen as not, we’ve set aside $550,000 for Canal Convergence. All I’m asking is we set aside, we make sure in the budget, we have funding for these programs,” she said.

“I’ll be looking at not cutting services, we’re a service organization. A budget is about priorities, and services are our priorities. I don’t want to make cuts that have to be born on the backs of our disabled population, for instance.”

Ms. Whitehead also pointed to hundreds of thousands of dollars going to city museums, Scottsdale Arts and WestWorld, although those venues are closed.

Further, Mr. Thompson has announced that there is not funds for city employees to receive performance raises this fiscal year due to the economic downturn. Ms. Whitehead asked for contingency funds for those staffs in the event that the economy returns quicker than anticipated.

“I’m disappointed, I think we’re saying, ‘we appreciate everything you’re doing, you’re putting our safety ahead of your own, but we’re not really showing it in this budget,’” Ms. Whitehead said.

“We have previously voted to give ourselves, City Council, a raise. It might be a nice gesture to say, ‘you know what, if our employees don’t get a raise, mayor and council won’t get a raise until employees get a raise.’”

Ms. Whitehead called for $700,000 in reserve funds for deficiencies or increase in demands to the community programs mentioned; and maintained funding for adaptive services and swim lessons.

“Even if we don’t end up finding a safe way to make those programs happen, that money just flows on to the next year, but if we’re going to make it a priority we need to not zero it out in the budget,” Ms. Whitehead said.

The council voted 7-0 to adopt the tentative budget and transfer the General Fund tax on food for home consumption into contingency, as proposed by Ms. Whitehead. 

A second public hearing will be held on the fiscal year 2020-21 budget followed by a request for council’s approval on June 16.