Phoenix Budget Shortfall: Largely Its Own Making & Glossing Over Budget Reality
See Video – Phoenix faces $38 million budget gap
Dustin Gardiner, The Republic | azcentral.com March 29, 2014
• Phoenix finds itself victim of overoptimistic revenue projections.
• Valley’s largest city caught unaware by looming $38 million shortfall.
• Council cut temporary food tax in half expecting revenue to improve fast enough to compensate.
In January, thousands of Phoenix residents opened their utility bills to find a newsletter trumpeting the city’s sound financial condition. Officials were said to be “cautiously optimistic” that everything was in top shape.
Then, the other shoe dropped. A few weeks later, the city announced it could face a shortfall as high as $52 million in the next fiscal year, even though revenues were expected to grow.
Now, Phoenix estimates the gap is closer to $37.7 million and could require numerous service cuts unless the city cuts employee pay or raises taxes. Popular programs, from senior centers to fire-prevention inspections, are among those on the chopping block.
Phoenix, the Valley’s largest city, finds itself in a budget pitfall that officials say is largely of its own making. Leaders are questioning the planning and spending practices of the past three years, when many services were restored to prerecession levels, pay raises dished out and an emergency food tax reduced.
City Manager Ed Zuercher, who took the city’s helm in October, released his trial budget about 10 days ago, outlining the potential cuts needed if the city can’t reduce employee costs or raise new revenues. The report is a starting point for budget talks over the next two months.
Zuercher said the shortfall is the result of overoptimistic revenue projections and rising mandatory expenses, such as employee pensions and health-insurance costs.
Phoenix projected its revenues would grow by about 7.3 percent during the current fiscal year; it has actually grown by about 5.6 percent, forcing the city to seek cuts to keep its budget balanced.
“It’s my job to end the surprise now,” a somber Zuercher told City Council members last week, pledging to provide more realistic, conservative revenue projections.
But some council members and employee-union leaders said they weren’t surprised by the new-found crisis. They contend the city has been glossing over its budget reality for a long time, adding expenses or cutting taxes while a structural deficit loomed.
It was clear from the beginning of the current fiscal year, which started July 1, that Phoenix would have a tough time hitting its ambitious revenue forecasts.
In October, council members voted overwhelmingly to cut the temporary food tax in half. Then-City Manager David Cavazos said that Phoenix had found enough savings and efficiencies that it could lose more than $33 million in tax revenue over two fiscal years without affecting services.
The food tax was already set to expire in March 2015, and officials expected things would improve fast enough to do without half of the two-cent tax for the remainder of its life.
Frank Piccioli, president of American Federation of State County and Municipal Employees Local 2960, which represents office workers, said Phoenix wouldn’t be in a deficit had it not cut the food tax.
He questioned whether city officials, including Cavazos, skewed budget projections for political reasons.
However, some council members said the city’s deficit isn’t a result of the food-tax trim. They point to the more than $18.3 million the city has spent on merit pay raises and longevity bonuses in the current fiscal year.
Zuercher’s budget assumes no changes to the city’s existing contracts with its employee unions. The current contracts call for all employees to take a 1.6 percent pay and benefit cut. But the contracts also provide for pay raises and bonuses based upon performance, and the vast majority of employees received raises.
Phoenix is renegotiating the contracts and has asked employees to take an additional 3 percent, or $30 million, cut, enough to prevent reductions in public services.
Council members and city staff will hear public input on the budget at more than 20 public hearings during the next month. Some have suggested looking at new taxes or fees to help the city preserve services long-term. In the end, officials said, it’s clear Phoenix can no longer afford to rely on rosy forecasts.
“This is like the new normal, unfortunately,” Councilman Bill Gates said of slow revenue growth. “We can sit and sort of wallow in it or we can say, ‘What did we learn from this?’ “