Title
Fiscal Year 2024-25 City Manager's Trial Budget
Description
This report transmits a balanced Fiscal Year (FY) 2024-25 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. The proposed FY 2024-25 General Fund (GF) Trial Budget includes a one-time projected surplus of $80 million. However, due to projected future deficits discussed at the Feb. 27, 2024 Policy meeting, the City Manager is recommending to set aside the surplus in reserve to help balance the FY 2025-26 GF budget.
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 2 and April 16, the FY 2024-25 Trial Budget will be presented to Phoenix residents for input at 11 community budget hearings. A complete list of hearing dates and times is included in Attachment C and is available on our website at phoenix.gov/budget/hearings. The website also includes the City's FundPHX interactive budget tool and information on how to provide feedback directly to the Budget and Research Department. All resident feedback received will be communicated to the City Council routinely 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 7.
Summary
The GF projected surplus in FY 2024-25 of $80 million represents one-time resources carried forward from the prior fiscal year, and savings from GF capital project costs. As mentioned above, the GF long-term outlook as presented in the GF Status and Multi-Year Forecast includes projected baseline deficits in FY 2025-26 and FY 2026-27, due to the State's actions to reduce the tax base. To ensure the GF budget remains sustainable, staff recommends the $80 million surplus be set aside and carried forward to be available next fiscal year to help balance the FY 2025-26 budget.
The FY 2024-25 Trial Budget is focused on preserving City programs and services delivered to the community. Over the last three fiscal years, the City has benefited from strong economic growth and the City Council has made strategic decisions to responsibly allocate available resources to community priorities and to invest in employee salaries. Over this time, significant investments have been made totaling $365 million to enhance and add a variety of programs and services for residents, and to ensure the City can be a market leader in pay to attract and retain a high quality workforce. Unfortunately, due to actions by the State of Arizona to diminish the tax base, discussed further in this report, revenues are expected to decline resulting in forecasted baseline deficits in FY 2025-26 of $(92) million and in FY 2026-27 of $(31) million. More information on the FY 2024-25 Preliminary GF Budget Status and Multi-Year Forecast is available on the Budget and Research Department website at phoenix.gov/budget.
Additionally, the proposed FY 2024-25 Trial Budget includes 30.0 ongoing full-time equivalent (FTE) positions needed in the GF (28.0 FTE) and Non GFs (2.0 FTE), and represents conversion of existing budgeted resources for critical position needs. 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 in this report is a status update of the budget supplementals added in FY 2022-23 and FY 2023-24 (Attachment B), the schedule of upcoming community budget hearings to engage residents and gather feedback (Attachment C) and the Annual GF Revenue Estimates Report (Attachment D).
Resources
FY 2024-25 GF resources, which include the beginning fund balance, net transfers and revenues, are projected at $2.100 billion or (1.5) percent lower than FY 2023-24 estimated resources. GF revenues for FY 2024-25 make up the majority of resources and are projected at $1.843 billion or (3.1) percent lower than the FY 2023-24 revised revenue estimate. As detailed in the GF Multi-Year Forecast report presented to City Council on Feb. 27, the negative growth in revenue is due to the State's actions to diminish the tax base by eliminating residential rental sales taxes effective January 2025 (Senate Bill 1131) and to reduce the individual income tax rate to the current "flat tax" of 2.5 percent (Senate Bill 1828). The combined impact to the GF of these legislative actions is estimated at $(54) million in FY 2024-25 and $(86) million in FY 2025-26. Revenue estimates assume no further negative impacts from the current legislative session. The FY 2024-25 GF estimates for each major revenue category are highlighted below, and additional information about assumptions and methodologies used to estimate revenue is provided in Attachment D:
- Local Sales Tax - $737 million;
- State Shared Revenue - $699 million;
- Primary Property Tax - $215 million;
- User Fees - $192 million.
Expenditures
FY 2024-25 GF expenditures continuing existing levels of service are projected to be $2.020 billion, or $1.931 billion excluding contingency funds. This compares to the FY 2023-24 GF expenditure estimate of $1.887 billion, representing an increase of $44 million or 2.3 percent. The increase accounts primarily for higher costs associated with 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 were partially offset by lower GF capital costs for vehicle replacements and pay-as-you-go projects that will instead utilize excise tax bond proceeds. The FY 2024-25 budget includes increasing the contingency fund from $81 million to $89 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 7.
Since FY 2007-08, employee pension costs have consumed a growing share of the City's GF resources. GF pension costs in FY 2024-25 are estimated to be $443 million, and represent 23 percent of total GF operating costs. The GF Multi-Year Forecast included estimated increases of $109 million, or 30 percent, between FY 2022-23 and FY 2026-27. 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 $3.7 billion, per the PSPRS June 30, 2023 actuarial valuation.
Future Considerations
The Proposed FY 2024-25 Trial Budget as presented does not account for additional costs that may be needed to continue efforts helping individuals experiencing homelessness upon expiration of American Rescue Plan Act (ARPA) funding, or from the ongoing Department of Justice (DOJ) investigation of the Phoenix Police Department. Preliminary estimates from the Office of Homeless Solutions (OHS) for the ongoing GF need to address homelessness is $6.5 million in FY 2024-25 and $22 million in FY 2025-26. Staff does not have projected costs at this time, or a reliable method to estimate, any potential budgetary impacts from the DOJ inquiry. It is also important to note that employee contracts expire at the end of the current fiscal year and management is currently negotiating with each bargaining unit. Exact details of agreements will be determined in the negotiations process.
Next Steps
In order to engage the community in the budget development process, staff will be holding 11 community budget hearings between April 2 and April 16. Budget and Research staff has also made available the FundPHX tool, which will be updated with the FY 2024-25 proposed Trial Budget. Residents are also welcome to contact the Budget and Research Department directly to provide input or ask questions about the budget. The schedule of budget hearings, the FundPHX tool, and contact information is available at phoenix.gov/budget.
The remaining key dates in this year's budget process are as follows:
Date Event
May 7, 2024 City Manager's 2024-25 Proposed Budget
May 21, 2024 City Council Budget Decision
May 31, 2024 2024-25 Tentative Budget Ordinance Adoption
June 12, 2024 2024-25 Funding Plan and Final Budget Ordinance Adoption
July 1, 2024 2024-25 Property Tax Levy Ordinance Adoption
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.