Tempe maintains its plan of more frugal spending and budget balancing measures with the loss of residential rental taxes, while staff looks at other potential losses of revenue and how the city plans to address them.
Deputy City Manager Lisette Camacho and Interim Municipal Budget Director Julie Hietter gave a presentation at Tempe City Council’s Feb. 24 work study session, providing the latest update on the city’s long-range financial forecast for its major operating funds.
Council last received a long-range financial forecast at a Nov. 19, 2024, meeting. Since then, Camacho said there has been a continued decline in local tax revenue because of lower year-to-date taxable sales and collection, and staff is recommending additional budget-balancing measures.
She noted while the forecast does account for the loss of residential rental tax revenue, it did not include the reduction of federally funded projects and programs as well as the proposed legislation that would repeal the tax on groceries.
“That issue is evolving at a fast pace,” Camacho said. “It’s very fluid right now, so we didn’t feel that it would be something that we would include in this forecast until we know more on the passage of that legislation.”
Addressing impacts from the elimination of residential rental taxes, Camacho said the city will see the greater impact in Tempe’s monthly sales tax report for February, given that it went into effect on Jan. 1.
Other forecast assumptions discussed included the reduction of state-shared revenue distributions because of decreases in state income and corporate tax collections, a continuation of strong building and trade revenues, an increase in investment earnings because of high interest rates, and continued salary plans and market adjustments.
Forecast updates
Camacho shared some of the updates since the November forecast, saying that local taxes are coming in lower than budget and in comparison to fiscal year 2024, and staff adjusted revenues even lower to reflect current trends.
“We are recommending to continue the budget-balancing strategies we presented last November that includes suspending recurring and non-recurring supplementals for two more years,” she said.
In addition to more conservative spending, staff is recommending the suspension of cash funding for capital projects, using drawdown from Public Safety Personnel Retirement System reserves to fund pension contributions for public safety personnel and using drawdown from Other Post Employment Benefits reserves for post-employment health benefits.
Camacho explained that these reserve funds were set aside for this purpose, and they are being put forth for their intended use.
As for revenues, she said that staff expect the passage of Proposition 479, which continued the half-cent sales tax in Maricopa County to fund transportation, to increase revenue for Tempe’s share of regional transit funding, but they will continue to monitor that.
Going over what has been observed since the repeal of the residential rental tax, Camacho said that Tempe’s general, transit and arts and culture funds are affected, totaling a 9% loss in sales tax revenue in fiscal year 2023.
“We are estimating $10 million of revenue loss across all three funds,” she said,
The revenue loss is expected to grow in the following years, estimating a $25 million loss in the 2028-29 fiscal year.
What’s to come
While staff didn’t include the proposed legislation prohibiting the food tax in this forecast, Camacho did briefly go over what that might mean for Tempe.
This legislation, Arizona House Concurrent Resolution 2021, would prohibit a municipality from imposing a transaction privilege tax on the sale of food items intended for home consumption. It’s intended to be sent to voters in the 2026 general election, and if approved, the exemption from taxing would be effective July 1, 2027.
The estimated annual revenue loss if Arizona HCR 2021 is approved.
Courtesy City of Tempe
Camacho also brought up the recent amendment to food tax legislation that capped the food tax at 2%, but she noted that it would not impact Tempe because its tax rate on food is at 1.8%.
“So even though this is evolving, we wanted to provide a worst-case scenario for the city council” she said.
Camacho provided the estimated annual revenue loss including the residential rental tax losses and if the food tax is repealed in the coming general election, totaling a $35.2 million loss in FY 2027-28 and a $38 million loss in FY 2028-29 across Tempe’s three operating funds.
For food tax alone, Tempe would lose about 5.3% of sales tax revenue, which is equal to $12.5 million in all funds. Camacho noted that Tempe is among the top five municipalities losing revenue if the legislation is passed.
Hietter also touched on Tempe’s enterprise funds and special revenue fund highlights, which mostly showed minimal impacts on the city’s water/wastewater, solid waste, emergency transport, transit, transportation and arts and culture funds.
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“That issue is evolving at a fast pace,” Camacho said. “It’s very fluid right now, so we didn’t feel that it would be something that we would include in this forecast until we know more on the passage of that legislation.”
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