Tentative Scottsdale budget talks show deep divide in financial prospectus

Global pandemic wreaks havoc on anticipated revenues

Posted 5/7/20

With revenue shortfalls stemming from the sudden loss of tourism this spring all but confirmed, Scottsdale City Council is pleading with its staff to bring forward realistic revenue projections as …

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Tentative Scottsdale budget talks show deep divide in financial prospectus

Global pandemic wreaks havoc on anticipated revenues


With revenue shortfalls stemming from the sudden loss of tourism this spring all but confirmed, Scottsdale City Council is pleading with its staff to bring forward realistic revenue projections as the annual financial blueprint is to be approved in two weeks.

With information available at this time, Scottsdale’s city treasurer reports the total loss of sales tax revenue --- a primary funding source for the city --- is down 26% when comparing March 2019 to March 2020.

Scottsdale City Council members voiced the need to make cuts to the city’s budget, but desire additional information to do so.

The fiscal year 2020-21 tentative operating budget is required to be approved before the first week of June, while the fiscal year begins July 1.

During a May 5 Scottsdale City Council meeting, elected officials voiced deep concern over the city’s financial situation.

Mayor Jim Lane, followed by the unanimous support of his peers, requested staff to return with a realistic assessment of revenue projections. A number of other suggestions were also posed by the City Council, including providing updated sales tax numbers, providing revenue forecasts specific to Scottsdale and evaluating municipal staffing positions.

Scottsdale’s budgeting estimations are seemingly a shot-in-the-dark as the city has to wait for sales tax revenues to be dispersed by the state --- which lags behind about six weeks. March collections were provided to the city on May 1, and the municipality is awaiting to hear how drastic the loss of funds for April will be.

The city’s tentative budget adoption sets the ceiling for how much money Scottsdale can spend next fiscal year --- after they approve the final budget adoption, funds can be decreased but not increased.

City Manager Jim Thompson presented data that shows the General Fund revenue reductions is estimated to be about $25 million short --- setting the revised budget at $313.5 million.

“We have received the majority of the March, or sales tax collections --- we will not be receiving any April sales tax collection until May 15,” Treasurer Jeff Nichols told council during its meeting.

“We want as much data, some of the data I’ll share with you tonight, as specific to Scottsdale --- but some is not. To the extent practical, I prefer Scottsdale-specific data to make decisions for the City of Scottsdale.”

Mayor Lane agreed with Mr. Nichols’ opinion on needing as much Scottsdale-specific data as possible because of the city’s unique dependence on sales tax and tourism.

Mr. Nichols says many of the local industries’ sales taxes are down. The hotel/motel industry is down 56%, which equates to $976,000. Restaurants are down 40% or $533,000.

“Overall, on the TPT, the 1% sales tax that goes into the General Fund, we’re down $2.8 million when comparing March 2019 activity to March 2020 activity to date,” Mr. Nichols said, which equates to 26%.

General Fund revenue that may be impacted by the COVID-19 pandemic includes not only local sales tax, but also state-shared sales tax, auto-lieu tax, license permits and fees, charges for service, and building permit fees and charges.

The city treasurer presented data from the Consumer Confidence Conference Board, which reflected sharp economic activity contractions, and a surge in unemployment claims.

Nationally, retail sales posted their largest monthly drop --- 8.7% --- month over month since record-keeping began in 1992. The unemployment rate is projected to hit 15-20% --- whereas the unemployment rate during the Great Recession peaked at 10%, shedding 8.7 million jobs.

“On a positive note, the recovery time, when compared to the last recession should be much shorter,” Mr. Nichols said.

Overall, Mr. Nichols says the city knows its funding sources are decreasing. The question is, how deep is that loss and for how long will this continue?

Following Mr. Nichols initial presentation on revenues, the City Council members began calling for more information.

Vice Mayor Kathy Littlefield asked for a graph or spreadsheet outlining the large income producers for Scottsdale so comparisons can be drawn between the two years.

“If we can do some kind of analysis on where we go as we move down, how we bring this back, where the problems are coming from, and estimate months of where do we have to go and how much do we have to cut in order to keep a balanced budget --- and where those budget cuts need to be,” Ms. Littlefield said.

“When we have so much of our percentage of our overall operating budget is in salaries, it’s going to be very, very hard to cut 40% or 50% of our budget without touching salaries. So I don’t really see quite how we’re going to do that but I’d like to have some ideas and extrapolations to work with so we can perhaps move forward and get some sort of idea ahead of time, before we’re all of a sudden looking at a 50% drop that we don’t know where we’re going to get the money from.”

Nuts and bolts of the tentative budget

City Manager Jim Thompson said since the beginning of COVID-19 hitting Arizona, and when the draft budget was first presented, reductions have been made.

On April 7, the council had a meeting to look at the proposed operating budget and capital improvement plan --- however, no data was available to make any meaningful forecast adjustments at that time. The council created 10 suggestions prior to the next iteration of the budget.

Mr. Thompson says $18 million has been eliminated from the budget, and spoke about the amount of reserve funds in city coffers.

Prior to COVID-19, the city was $13.4 million ahead in revenues from what was budgeted.

“We were having a banner year, an excellent year,” Mr. Thompson said.
Since the April meeting, Mr. Thompson says the General Fund revenue has been reduced by $24 million, and the transfers into the General Fund from other city accounts is also being reduced.

“There was a question asked earlier --- regarding are we going to look at our other funds, in particular utility funds, to support the General Fund in any shape or form? That answer is: ‘no,’” Mr. Thompson said. “We are not doing what many other cities have done in the past during shortfalls, which is to look to utilize some of those utility funds through rate structures, rate settings, to use those funds and transfer over to the General Fund for administrative costs. We are not changing any of that, we are not requesting --- in fact we’re actually reducing the amount of transfers from those other funds.”

Mr. Thompson outlined a number of budget-balancing initiatives in the operations department including:

  • Reducing or delaying division spending;
  • Freezing third year or three-year market catch-up;
  • Freeze performance adjustments for eligible employees;
  • Hold 249 part-time workers from closed facilities/programs;
  • Freeze vacation trade program for eligible employees; and
  • Hold 216 full- and part-time positions vacant.

Additionally, 36 vehicle replacements are delayed; the health care trust fund has been drawn down; and CIP transfers out due to lower tax and interest revenues have been reduced.

“The way we propose the budget at this point in time with reduction of $18,283,000 since the last proposal you had, it allows us to grow the General Fund so we have a cushion basically, built in of $9 million to start with,” Mr. Thompson said. “Our sources are $9 million more in the budget than our uses, as budgeted. So we start off with $9 million-plus.”

Mr. Thompson outlines between the beginning balance for the General Fund reserve, operating contingency and unreserved fund balance there will be more than $86 million available due to reductions in spending and the conservative nature of revenues. Mr. Thompson compares the $86 million to last year’s total fund balances of $77.7 million.

“We still anticipate that amount to grow to $105 million at the end of 20-21. Based on our budget, that’s if we received 100% of our revenue and if we spend 100% of our expenditures as proposed,” Mr. Thompson explained.

“If we’re short and we receive 10% less in our revenues, we would reduce our expenditures to match that, still trying to achieve the balanced budget. But in fact, we actually have growth in our savings account and fund balance, because, again, our revenues are projected to be higher than our expenses at this point. Obviously that’s subject to change as we get more data.”

Additionally, Mr. Thompson plans on the award of COVID-19 grant funding in the amount of $3.3 million; however, not all of those funds will go to the General Fund.

Further discussion points the council could explore to look at cost-saving measures, Mr. Thompson said are using the unreserved fund balanace; deferring or closing CIP projects; changes to program and services levels; and delaying some rates and fees increases.

The council is scheduled to adopt its tentative budget on May 19, followed by final budget adoption on June 16.

Council calls for a reality check

Mayor Lane asked several questions of staff, and voiced his opinion on the situation several times throughout the in-depth discussion. Overall, he appears concerned the municipality isn’t looking at a realistic forecast.

“When we look at the difference for the adopted budget for fiscal year end of 2020 versus the forecasted year end of fiscal year ‘20-21, you’re looking at like a 3% reduction in the total amount of revenue versus the total amount of revenue that’s forecasted for that fiscal year we’re calculating right now,” he said.

“It’s a minor adjustment of 3.6% to 4% depending on which number you look at. It just does not seem to be reflective of the basic information we’re receiving now when we’re talking about that budget number. Now maybe that budget number, or General Fund revenue reductions, need to be re-reviewed when we have more information, but just coming out of the box, it just seems unrealistic.”

Mr. Lane said there is enough information for “anybody and everybody” to see.

“This just seems like it’s unrealistic and I’m not all about the visual, but if we go back to the public and we say ‘yeah we’re going to cut the budget by 3.6%’ or anything remotely close to that, it’s going to be taken as something is happening --- one way or another --- there’s going to be a problem that we’re not looking at it realistically and I don’t believe we are.”

Linda Milhaven said she thinks trying to guess what the impacts will be would be dangerous.

“I think the treasurer and city manager have shown great restraint and courage to hold back from trying to guess, as best they can, about where we are,” Ms. Milhaven said, thanking the two men for their thoughtfulness. “It’s clear that we’ve got lots and lots of options.”

Councilmembers Virginia Korte and Suzanne Klapp --- who are both seeking election to the mayor’s seat in November --- called for measures to be taken.

“I’m really concerned that we brought forward a General Fund revenue of $326, or almost $327 million, because I believe that if we look at what the state is forecasting --- and I know we want to make these decisions and bring forward these numbers based on real data --- but I don’t want anyone out there believing that we’re going to be see $326 million revenue for next year given the impact of the coronavirus,” Ms. Korte said.

“Our tourism is 30-35% of our economic base, and we know that tourism today is about, well, it’s decreased probably 90%. I guess what I’m trying to say is that I understand the need to look at these numbers based on data, but I know that Scottsdale is going to be very different when we emerge from this isolation and social distancing. Tourism alone is going to be two, four years of comeback, if it does come back.”

Ms. Korte said she thinks the city is going to have to go pretty deep with its cut, and she hopes everyone is prepared to do that.

Ms. Klapp also called the budget unrealistic, saying the sources projected are way too high.

“I do understand why city management likes to have a high budget ceiling. I think right now we have to be totally realistic about what our revenues are going to be as they come in over the next few weeks,” Ms. Klapp said. “At the 19th meeting, we’re going to have to take a hard look at what we all believe where the revenues are going to fall. I would say, at best, we’re looking at a $50 million drop.”

Ms. Klapp asked if the drop is $50 million or more, how will the city address that?

“Are we going to deplete our unreserved fund balance? We can defer the CIP projects as mentioned --- we have to take a hard look at this and make some hard decisions now. If we don’t start planning right now for the worst that could happen, later on we will have to react to the worst that happened,” she said.

“The mayor talked a little bit about our being on the council back in 2009, and we did not react fast enough to that. I have to admit to that. We should have recognized it earlier, but we had to go back and make some very serious cuts later that we should have recognized from the beginning. Mistakes that were made by all of us on the council back then, I don’t want to see that happen again.”

The elephant in the room

Only a couple of public comments on the budget were submitted to council --- including one from former city treasurer and councilman David Smith.

Mr. Smith pointed to personnel costs --- calling it “the elephant in the room” --- which account for 74% of $286.3 million of city expenditures.

“City staff stated their intention to ‘...monitor revenues and made additional adjustments to expenditures in response.’ Frankly, councilmembers could predict revenues themselves by taking a 10-minute stroll through Fashion
Square or a short walk up Fifth Avenue or visit any of the shuttered hotels on which our economy depends,” Mr. Smith wrote in his public comment.

“There is a temptation to say, ‘Let’s wait until we get better numbers.’ To that temptation, I would say, ‘Look around you, talk to your fellow citizens...the evidence of a great recession is everywhere.’ The time to react is now, not later!”

Scottsdale resident Rob Fishman supplied Independent Newsmedia with his public comment as well, stating in an email that the city’s slides for the presentation are “woefully inadequate as to what is needed.”

In his official comment, Mr. Fishman details the 2020-21 budget as potentially the most important budget proposal in Scottsdale history.

“The budget requires careful consideration of each line item, and should require City Council and the mayor’s office working together in a room reviewing each expense category. There should be no sacred cows,” Mr. Fishman stated, adding that he doesn’t believe the city should simply reduce expenses by X-amount.

“This has significant implications for the future strategy of Scottsdale relative to sources of revenue and services as well. We must find sources beyond retail and tourism that will replace and exceed the amounts lost from those areas.
For instance, attracting technology and biotech companies should be a priority. We will be in competition with other cities. We need to be positioned to win that competition.”

Mr. Fishman closes his comment by stating: “Scottsdale’s reputation as the best among others can remain. It will just look different.”