City fears huge budget hit from downturn

Big cuts are on the way for Scottsdale’s next city budget, though their extent is still unknown as city leaders wait for more information on how the coronavirus outbreak has affected the economy.

An early draft of the budget presented to the City Council on April 7 included a maximum of $296.1 million in spending from the general fund – a nearly $11 million increase over spending in the current fiscal year.

However, both Mayor Jim Lane and city staff were quick to stress that much of that budget was formulated in the weeks and months before the coronavirus pandemic decimated the city’s economy.

Arizona is projecting a $1 billion deficit in its coming fiscal year – a stark difference from the $1 billion surplus it enjoyed only a few months ago.

“Like many cities, we were just finishing up the proposed budget when the Covid-19 pandemic began to spread, so this budget was primarily put together prior to the health crisis,” said Judy Doyle, Scottsdale’s budget director. “And as a result, we know modifications will be necessary.”

Lane told the Progress that the budget presented on April 7 will likely undergo significant changes before the Council votes to adopt it at some point before the new fiscal year begins July 1.

Council is already trying to come to grips with how deeply it will have to cut the budget but lacks some critical information due to lags in the time it takes the state to provide sales tax revenue information.

“We just don’t know,” City Manager Jim Thompson told Council, referring to the pandemic’s effect on revenue.

Sales taxes make up the largest portion of the city’s income, accounting for 42 percent of the projected general fund sources for the next fiscal year, according to city numbers.

The lack of data is tied to a statewide policy change that had the state Department of Revenue take over sales tax collection and reporting duties for all cities in 2017.

Lane said an unintended result of that change were delays of a month or more in the transmission of sales taxes and trend information to cities.

“We have a significant lag in when we receive (sales tax revenues), but we even have a more significant lag in the information that helps us to project on a timely basis,” Lane said. 

“It was one of the consequential effects of that reform, which I certainly thought was fine to do, but nevertheless, for a city’s planning and access to its tax receipts, it’s been a little bit detrimental,” the mayor added.

Thompson said the city will not see any revenue numbers from March until May.

Still, the city could have at least a partial picture at some point in May, when the Council will likely adopt its tentative budget, which would set the city’s maximum spending cap for the next fiscal year.

Thompson said the city has already started implementing some cuts. 

That included immediately cutting a batch of nearly $14 million in requests to $4.9 million to cover contracted janitorial services, expenses for the Fire Department, one-time election expenses and a fall-mitigation program.

The city is also reducing contracted services and leaving 194 vacant employed positions unfilled while freezing bonuses and market-rate salary adjustments that would have gone into effect on July 1.

Thompson said the city, which will redeploy existing staff on emergency assignments, will save $6.8 million annually based on the unfilled positions alone.

Councilwoman Suzanne Klapp said staff needs to remove those positions from the budget entirely, not just leave them unfilled, while still counting against the city’s expenses.

It is not known whether the city will have to lay off any employees. 

Klapp said she supported the pay increase freezes, stating “I don’t want to eliminate people at the same time that we would be giving salary increases.”

Thompson said the city will also save $1.4 million through the end of June after shutting down trolley service due to low ridership and the risks of spreading Covid-19.

Klapp said the city may have to cut more services or programs as well.

Even without data from the state, Council is already predicting a significant fiscal hit based on available figures and anecdotal evidence showing the area’s tourism industry and related services like restaurants, bars and entertainment, which have been decimated by social distancing.

Tourism accounts for about 34 percent of Scottsdale’s economic engine, Lane said.

Over the first three weeks of March, occupancy at Scottsdale-area hotels and resorts declined 42 percent year over year, according to Experience Scottsdale. The occupancy rate slumped to 10.5 percent on March 21, down 89 percent from last year. 

Lane said revenues for tourism-related businesses were down nearly 66 percent for the week of March 17.

Lane said the city could see a drop of around 70 percent in bed tax revenues from hotels and motels.

The downturn could also have longer-term impacts on the city in the form of state shared revenues, a collection income tax, sales tax and other revenues doled out by the state to cities.

Around 47 percent of the nearly $71 million Scottsdale expected to receive in state shared revenues for this fiscal year came from its income tax allotment, which is based the state’s personal income tax haul from two years prior.

That means Scottsdale in two years when it is receiving shared revenues partially based on the state’s 2020 income tax revenues.

Though it took no action on April 7, several Council members are already calling for significant cuts of 25 percent or more to the city’s budget in light of those anticipated losses.

Councilwoman Kathy Littlefield called for a reduction in spending and referenced Phoenix Mayor Kate Gallego’s call for a 25 percent spending reduction.

Littlefield said Scottsdale may have to go even further.

“Right now, we are a tourism city with no tourists,” Littlefield said.

Councilmember Virginia Korte called for Council to immediately cut the budget’s maximum spending cap by 10 percent.

Korte suggested that though it likely would be steeper, “that is in good faith to our citizens to illustrate that we are sensitive and willing to make the hard decisions in moving this city forward.”

Councilman Guy Phillips suggested using city’s unreserved fund balance – money without a designated use – as a “rainy day fund” to cover some of the city’s liabilities in the interim as it figures out just how bad the crisis will be.

“Of course, it’s raining now,” Phillips said.

The city projects to have an ending balance of over $106 million at the end of this fiscal year. That represents excess revenues collected by the city over the past several years that have not been needed to cover expenses.

However, the city’s budget forecast only designated $500,000 from the balance as “undesignated.” It also budgeted $2.7 million for operating contingencies and $28.8 million for an operating reserve.

The forecasted budget also allocated $60.2 million towards public safety pension liabilities and $14.3 million for infrastructure reimbursements for Nationwide’s Cavasson development. 

City budget policies do account for the use of some of those funds in emergencies.

Former Councilman David Smith, also a former city CFO, called on the city to tap into next year’s projected ending fund balance of $122.1 million to deal with the crisis, including the $74.7 million reserved for pension liabilities.

“It is deceptive to label and reserve any portion of the General Fund ending balance as PSPRS pension related.  The $74.7 million actually represents taxes collected since the last recession, over-and-above what was needed for city services,” Smith wrote Council.

This is not their first time dealing with a financial crisis for some Scottsdale officials, including Lane. 

Lane said the immediate impact of the current crisis on city revenues could dwarf the effects of the 2008 Great Recession, particularly in relation to Scottsdale’s tourism industry.

“We’re talking about numbers that are two and sometimes three times higher than in the past in 2001 with 9/11 and then, of course, in 2009  in the peak of the depression,” Lane said.

Lane said the worst single week for the city’s tourism industry during the last recession came in September 2009, when revenues were down about 25 percent over the previous year.

That number is dwarfed by the nearly 66 percent decline the industry experienced the week of March 17 this year, he said.

But Klapp said she anticipates the current downturn will not last as long as the last recession, saying, “That was an economic downturn, and this a crisis that may peak and dip quickly.”

 “I don’t see it as quite the same as the (2009-2011) recession, which was a long trough before it started coming up,” she added.

Klapp said the downturn could extend into 2021 before the local economy sees signs of recovery. 

Council did ask Thompson to bring back a modified budget for review in early May before the meeting on the tentative budget.

The Council had originally planned to consider the tentative budget in early May but Thompson said that date could be moved to later in the month to allow the city more time to gather data.