Title
Fiscal Year 2025-26 Proposed City Manager's Trial Budget
Description
This report transmits a balanced proposed Fiscal Year (FY) 2025-26 City Manager's Trial Budget for community review and comment.
THIS ITEM IS FOR INFORMATION AND DISCUSSION.
Report
The Trial Budget is an important step in the City's budget development process. It provides the Mayor, City Council and community an opportunity to review a proposed, balanced budget months in advance of final budget adoption in June. This report includes the proposed FY 2025-26 General Fund (GF) Trial Budget and strategies to ensure the budget remains balanced.
The City of Phoenix is committed to engaging residents in the budget process and this year there are many opportunities for residents to provide feedback outside of regularly scheduled City Council meetings. Between April 1 and April 16, the FY 2025-26 proposed Trial Budget will be presented to Phoenix residents for input at 12 community budget hearings. A complete list of hearing dates and times is included in Attachment D and is available on our website at https://www.phoenix.gov/budget. All resident feedback received will be provided to the City Council so it may be used in budget decision making. As a result of public input, changes could be made to the Trial Budget when a proposed City Manager's Budget is presented to City Council on May 6.
Summary
As presented at the February 25, 2025 Policy meeting, the GF budget outlook reflects structural deficits over the next three fiscal years requiring strategic decisions to balance the budget. The preliminary GF Status for FY 2025-26 reflected a baseline deficit of $(36) million and the forecast reflected projected shortfalls in FY 2026-27 of $(83) million and in FY 2027-28 of $(6) million primarily due to the State's actions to eliminate residential rental sales tax via Senate Bill (SB) 1131 and to lower the individual income tax rate to the flat tax of 2.5 percent (SB 1828). These actions by the State limit local control and will reduce ongoing City revenues going forward. Staff completed the annual 7+5 technical expenditure and revenue review process and adjustments have been made to the FY 2025-26 GF Status of approximately $(3) million primarily to reflect adjustments to property tax and emergency transportation revenue estimates. The revised FY 2025-26 GF Status reflects a projected deficit of $(39) million.
This report includes a proposed balanced GF Trial Budget with the strategies presented to the City Council on February 25, 2025, to resolve the projected FY 2025-26 deficit, and includes necessary resources going forward to offset the State's action to reduce City revenues, and provide future capacity for necessary additions to the budget. The proposed GF Trial Budget assumes City Council approval of the proposed strategies included in this report.
Additionally, the proposed FY 2025-26 Trial Budget includes proposed GF and Non-GF supplementals (Attachment A) for the Fire Department to reduce emergency response times, for the Office of Homeless Solutions to continue efforts helping the unsheltered population and to address impacts of homelessness on neighborhoods, and to add resources to the Water Services Department to reopen the Cave Creek Water Reclamation Plant.
The proposed FY 2025-26 Trial Budget also includes administrative position additions and conversions of temporary full-time equivalent (FTE) positions to ongoing positions. Funding for these positions has been identified and accounted for in department operating budgets. Details on each position can be found in Attachment A. Also included are proposed GF reductions totaling $24 million with limited impacts to service delivery (Attachment B), a status update of the budget supplementals added in FY 2023-24 (Attachment C), the schedule of upcoming community budget hearings to engage residents and gather feedback (Attachment D), the annual GF Revenue Estimates Report (Attachment E), and a list of State legislation introduced and active in the current legislative session that if passed would further limit local control and would have negative impacts to the City's budget (Attachment F).
FY 2025-26 GF Budget Status
As mentioned above, the revised GF Budget Status for FY 2025-26 is a deficit of $(39) million, reflecting projected total resources of $2.040 billion less projected total expenditures of $2.079 billion, further detailed below.
GF Resources
The revised FY 2025-26 GF Status reflects a projected deficit of $(39) million and includes the beginning fund balance, net transfers and revenues projected at $2.040 billion or (4.8) percent lower than FY 2024-25 estimated resources. GF revenues for FY 2025-26 make up the majority of resources and are projected to be flat at $1.819 billion or (0.0) percent growth after 7+5 technical revenue adjustments compared to the FY 2024-25 revised revenue estimate. As detailed in the GF Status and Multi-Year Forecast report presented to City Council on February 25, GF revenue is estimated to decline in the current fiscal year by (4.5) percent, or $(86) million, compared to FY 2023-24. The significant decline in revenue is primarily due to the State's actions to diminish the tax base by lowering individual income tax rates discussed below; and elimination of residential rental sales taxes effective January 2025 (SB 1131). The revised estimated five month impact from the loss of residential rental sales tax to the GF for FY 2024-25 is approximately $(19.3) million and the ongoing annual impact in FY 2025-26 is $(47.4) million. SB 1131 also impacts non-GFs including Public Safety, Parks and Preserves and Transportation 2050. The revised estimated five-month loss to all funds in FY 2024-25 is $(37.0) million and the ongoing annual impact in FY 2025-26 is $(90.7) million. The impact through the multi-year forecast period to FY 2027-28 for all City funds is an estimated revenue loss of $(321) million.
Additionally, SB 1828 reduced individual income tax rates from a progressive four tax bracket system to the current "flat tax" of 2.5 percent in 2022. Cities and towns in Arizona receive state shared income tax revenues based on collections from two years prior and is based on relative population share. On June 9, 2023, the State's Joint Legislative Budget Committee (JLBC) notified the legislative membership of a significant decline in state GF revenue collections, which is primarily due to the individual income tax rate reduction. Budget and Research staff rely on projections from the JLBC to estimate this revenue stream for budget development. This action by the State is expected to result in less ongoing state shared income tax revenue to the GF compared to prior projections had the tax rate not been decreased. This negative impact is demonstrated in the significant decline in FY 2024-25 and FY 2025-26 for state-shared income tax revenue of $(84.7) million and $(22.7) million, respectively. Revenue projections account for the reductions mentioned above to city sales tax and state shared revenue.
The FY 2025-26 GF estimates for each major revenue category totaling $1.819 billion are highlighted below:
- Local Sales Tax - $723 million;
- State Shared Revenue - $682 million;
- Primary Property Tax - $223 million;
- User Fees - $191 million.
GF Expenditures
FY 2025-26 GF expenditures to continue existing levels of service are projected to be $2.079 billion, or $1.987 billion excluding contingency funds. This compares to the FY 2024-25 GF expenditure estimate of $1.946 billion, representing an increase of $41 million or 2.1 percent excluding contingency funds. The increase accounts primarily for higher costs associated with inflation and increases in employee salaries and fringe benefits, including higher pension costs discussed below, and accounts for the City Council approved Classification and Compensation Study and negotiated labor increases. These cost increases are partially offset by lower GF capital costs for pay-as-you-go projects. The FY 2025-26 budget includes increasing the contingency fund from $89 million to $92 million, to reflect 4.75 percent of operating expenditures. Expenditure amounts may change over the coming weeks as staff continues to refine final estimates prior to the presentation of the City Manager's Proposed Budget on May 6.
Employee pension costs have consumed a growing share of the City's GF resources over the past 10 years. GF pension costs in FY 2025-26 are estimated to be $464 million, and represent 23 percent of total GF operating costs. The GF Multi-Year Forecast included estimated increases of $63 million, between FY 2024-25 and FY 2027-28. This increase is primarily caused by rising costs in public safety pension costs. The City is committed and legally required to pay 100 percent of our actuarially required contribution every year. Also, under the leadership of the City Council, a pension funding policy has been adopted each year as required by state statute. Additionally, pension reform for the City of Phoenix Employees' Retirement System (COPERS) is helping to stabilize civilian pension costs. While reform efforts have been successful for the Public Safety Personnel Retirement System (PSPRS), there remains a significant unfunded sworn pension liability of approximately $3.8 billion, per the PSPRS June 30, 2024, actuarial valuation.
Other Budget Considerations
The FY 2025-26 Preliminary GF Status and Multi-Year Forecast report available at https://www.phoenix.gov/budgetsite/budget-books/2025-30_General_Fund_Multi_Year_Forecast.pdf included several assumptions and risks to projections, including economic risks and proposed State legislation that could further significantly reduce City revenues. Significant economic uncertainty exists including impacts from the new Trump administration policies on tariffs, tax law changes, reductions to Federal agencies, potential elimination or reduction of Federal Grant programs; and market volatility, Federal Reserve actions to reduce inflation, geopolitical concerns and conflicts, housing affordability, and overall consumer confidence.
Additionally, several introduced and active State legislative bills could further limit local control and reduce City revenues if signed into law. For those bills that are still active and with a fiscal note prepared by the JLBC, the estimated annual impact to City revenue is $(69) million. Additionally, some bills could increase City expenditures requiring additional resources and further straining the City's budget. Attachment F provides information from Government Relations on bills in the current legislation session that if passed could have negative impacts to the City.
Proposed Strategies to Balance the GF Budget
Several options are recommended for City Council consideration to resolve the projected FY 2025-26 budget shortfall and provide necessary resources going forward to balance the budget, protect existing programs and services, and provide future capacity for necessary additions to the budget.
The proposed FY 2025-26 Trial Budget included in this report contains the below strategies to balance, provides additions to the budget for the Fire Department and Office of Homeless Solutions and recommends carryforward of resources (set-aside) to help balance the FY 2026-27 budget and/or provide for future labor increases, or other City Council and community priorities.
Proposed strategies include:
- Increase the Transaction Privilege Tax (TPT) and Use Tax rate 0.5 percent effective July 1, 2025, from 2.3 percent to 2.8 percent, as posted on the City's website. www.phoenix.gov/Documents/2025-PHX-Tax-Notice-Info.pdf.
- Reprioritize spending and reduce ongoing GF costs by $24 million (Attachment B).
- Use of excise tax bond proceeds to pay for public safety and other GF capital needs totaling $150 million to reduce the up front cost burden to the GF (City Council approval of an excise tax bond sale is scheduled for April 9).
- Set-aside $92 million in FY 2025-26 to be available to balance FY 2026-27.
- Use of Non-GFs to reduce GF costs for major maintenance and citywide street transportation and construction services.
The City of Phoenix TPT and Use Tax rate to support GF programs and services is currently 1.2 percent (of the total 2.3 percent) and has not been increased since 1986 despite the significant growth in population, square miles, and city program and services over this time period. Phoenix's TPT and Use Tax rate is also lower than six other surrounding cities. The rate has been increased since 1986 with the most recent increase in January 2016 to the current 2.3 percent, however past rate increases have been for specific voter approved purposes including Public Safety, Parks and Preserves and Transportation with none of the increase applied to the GF. The revised estimated annual revenue to be generated by increasing the TPT and Use Tax rate from 2.3 percent to 2.8 percent is approximately $117 million to the GF and $132 million to Non-GFs.
The City posted the required 60-Day Notice of Intent on January 15, 2025, for a potential TPT and Use Tax rate increase in compliance with Arizona Revised Statute §9-499.15. To allow the public an opportunity to provide feedback on the proposed rate increase five community information sessions were held across the City between January 27 and February 6. Staff also provided information on the City's Newsroom, Budget and Research Department website, and on social media platforms. Additionally, staff presented information to the City Council on February 25, 2025, on the estimated impact of the proposed tax rate increase and the City Council report is available on the phoenix.gov/budget website. On February 27, 2025, the City posted the required 15-Day Statutory Notice of Intent to Increase the TPT and Use Tax rates with City Council consideration scheduled for a vote immediately following presentation of the proposed FY 2025-26 Trial Budget on March 18, 2025, at 2:30 p.m. in the Phoenix City Council Chambers, 200 West Jefferson Street, Phoenix, AZ.
Information about the proposed TPT and Use Tax rate increase, and budgetary considerations for the increase along with the applicable business classifications that would be increased from 2.3 percent to 2.8 percent if approved by City Council, is available at: https://www.phoenix.gov/budget.
Additionally, City Council approval of a $150 million excise tax bond sale will be included on the April 9, 2025, Formal Council agenda for action. Use of excise tax bond proceeds is commonly used to pay for large capital purchases that will last multiple years; and will reduce the up front cost burden on the GF. Proceeds will be used for Fire replacement apparatus ($40 million), replacement of a public safety rescue helicopter ($8.5 million), replace public safety radios ($30 million), build two new Fire Stations and purchase additional Fire apparatus to reduce response times citywide ($50 million), provide resources for the Fire Department's cost share of the new ShapePHX system ($9 million), and remaining resources will be used for other major facility or information technology needs (12.5 million).
FY 2025-26 Proposed Trial Budget
The above proposed strategies are estimated to offset the revenue losses caused by State actions, protect existing programs and services, and provide additional resources for critical additions to the budget detailed below. The FY 2025-26 proposed GF Trial Budget as presented, including the proposed strategies referenced in this report, result in a potential one-time surplus of $17 million; reflecting projected total resources of $2.172 billion less projected total expenditures of $2.155 billion.
To ensure the budget remains balanced in the future, and considering economic uncertainty and legislative risks discussed in this report and previously with the City Council, the City Manager recommends the $17 million one-time surplus be set aside and carried forward to be available next fiscal year to help balance the FY 2026-27 budget if needed (Attachment A).
Details on the proposed FY 2025-26 supplementals is provided below and also included in Attachment A.
Phoenix Fire Department (PFD)
The PFD provides lifesaving services to all Phoenix residents and visitors and includes emergency medical and transportation services, all-hazards incident management, property protection through fire suppression, and community risk reduction efforts. The recent fire catastrophe in Los Angeles, CA serves as a reminder the importance of adequately resourcing the PFD to ensure sufficient levels of staffing, equipment and facilities are ready to respond to emergencies. A critical measurement of the PFD effectiveness in operations is emergency response time and is measured from the time of dispatch of an emergency apparatus to when the unit arrives on scene. The National Fire Protection Association (NFPA) establishes the standard fire departments utilize to measure performance. Currently, the PFD’s response times exceed the NFPA established standards. While the department continuously evaluates innovative ways to improve response times, additional resources are needed to increase the number of fire stations and facilities, personnel, and equipment to keep pace with the significant growth in geographic area and population the department must serve. Supplemental needs for the Fire Department (Attachment A) include conversion of 32 grant funded sworn positions to the GF estimated at $3 million in FY 2025-26 and $5 million ongoing, add 24 sworn personnel to staff the new General Obligation Bond funded Fire Station 15 at 45th Avenue and Camelback Road estimated at $2 million in FY 2025-26 and $4 million ongoing, and provide a dedicated $25 million in GF resources going forward to add 134 sworn and 19 civilian personnel to reduce emergency response times.
Once fully implemented, the estimated impact of additional sworn personnel will be an improvement in localized and citywide fire response times based on 2024 incident data at the 90th percentile. Fire critical emergency medical services (CEMS) response times are projected to improve from 8 minutes and 30 seconds to 4 minutes and 25 seconds in the localized communities where the units will primarily serve. Fire ambulance response times are projected to improve from 10 minutes and 42 seconds to 4 minutes and 44 seconds in the localized communities. Based on the estimated citywide impacts of the budget additions, Fire CEMS response times are projected to improve from 7 minutes and 23 seconds to 7 minutes and 14 seconds. Based on the estimated citywide impacts of the budget additions, Fire ambulance response times are projected to improve from 9 minutes and 38 seconds to 9 minutes and 29 seconds. These response times could vary based on any future adjustments to unit placement and the hours of service to meet the community's needs. The additional sworn personnel will staff new apparatus to be placed in service around the City, and new Fire stations including Station 71 located at 60th Street and Mayo Boulevard, and Station 93 at Metrocenter (location site to be determined). The additional apparatus and fire stations will be funded by excise tax bond proceeds (City Council approval scheduled for April 9).
Office of Homeless Solutions (OHS)
The OHS has made tremendous progress in addressing homelessness over the last two years. Investments in the infrastructure of the region’s homeless services system have been monumental. As we move out of pandemic-era funding, OHS has unfunded needs necessary to continue its momentum and ensure the transformational projects and services implemented in the last two years can continue. Also important to note on November 5, 2024, voters passed Proposition 312 Property Tax; Refund; Nuisance Enforcement that allows property owners beginning in Tax Year 2025 to apply to the Arizona Department of Revenue for a property tax refund if the owner documents expenses caused by a city, town, or county that either (1) declines to enforce existing laws prohibiting illegal camping, obstructing public thoroughfares, loitering, panhandling, public urination or defecation, public consumption of alcoholic beverages or use of illegal substances, or (2) maintains a public nuisance. The City is unable to project the potential costs associated with Proposition 312 but will have to identify a funding source. The passage of this proposition furthers the need for the City of Phoenix to address and provide ongoing resources for homelessness.
GF resources will be needed in 2025-26 for homelessness with revised estimates at $4.5 million due to the expiration of American Rescue Plan Act (ARPA) funding. Funding is necessary for a portion of OHS operational costs, operational costs at an affordable housing site for very low-income older adults, operational costs at three emergency shelters (Rio Fresco, North Mountain Healing Center, and the temporary Washington Shelter) and heat relief efforts. The need in 2026-27 and going forward is estimated at $26.0 million and will fund a portion of OHS operational costs, the temporary Safe Outdoor Space, operational support for five emergency shelters (Rio Fresco, North Mountain Healing Center, the temporary Washington Shelter, Central Arizona Shelter Services, and the Phoenix Navigation Center), some operational costs at the Key Campus and heat relief efforts. Staff will continue to seek additional external funding for these programs, and evaluate other City funding sources, which if received would offset the need for a portion of the ongoing General Fund request.
More information on GF proposed reductions totaling $24 million is included in Attachment B. The proposed reductions do not include any filled City positions, but elimination of 18.2 vacant positions; and represent lowering costs for non-personal related line items included various contractuals, commodities and minor capital outlay. These reductions will not have a significant impact on service delivery. Finally, more detail on GF revenue estimates is provided in Attachment E and assumes the proposed TPT and Use Tax rate increase.
The proposed FY 2025-26 Trial Budget also includes a Non-GF supplemental budget addition for the Water Services Department to add $5.6 million for 28.0 FTE and 20 vehicles to reopen the Cave Creek Water Reclamation Plant. This addition would allow the City to expand capacity for wastewater treatment and water purification, maintain environmental and safety standards, and uphold technological process control and security standards (Attachment A).
Next Steps
In order to engage the community in the budget development process, staff will be holding 12 community budget hearings between April 1 and April 16. Attachment D includes the schedule of budget hearings. Residents are also welcome to contact the Budget and Research Department directly to provide input or ask questions about the budget. More information on the budget and how to submit feedback directly to the City, is available at https://www.phoenix.gov/budget.
The remaining key dates in this year's budget process are as follows:
Date Event
May 6, 2025 City Manager's 2025-26 Proposed Budget
May 20, 2025 City Council Budget Decision
June 4, 2025 2025-26 Tentative Budget Ordinance Adoption
June 18, 2025 2025-26 Funding Plan and Final Budget Ordinance Adoption
July 2, 2025 2025-26 Property Tax Levy Ordinance Adoption
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.