Title
General Fund 2024-25 Preliminary Budget Status and Multi-Year Forecast
Description
This report transmits the preliminary status for the General Fund (GF) Fiscal Year (FY) 2024-25 budget and a multi-year GF forecast through FY 2026-27 (Attachment A). The multi-year forecast is being presented to the Mayor and City Council as an essential tool in long-term budget discussions and decision making.
THIS ITEM IS FOR INFORMATION AND DISCUSSION.
Report
Summary
The GF budget outlook for FY 2024-25 reflects a projected one-time surplus of $80 million. The City has experienced strong growth over the past three fiscal years with continued increases in resources. However, as the attached multi-year forecast report (Attachment B) demonstrates, projected deficits in FY 2025-26 and FY 2026-27 will require strategic decision making to ensure the GF budget remains balanced. Staff will update revenue and expenditure estimates in the coming weeks as part of the annual 7+5 technical review process and incorporate required changes to projections. The 2024-25 Trial Budget will be presented to City Council on March 19, and will include recommendations on how to responsibly allocate the one-time surplus.
The attached Multi-Year Forecast report includes estimates of future GF resources and expenditures for FY 2024-25 through FY 2026-27 based on several economic and budgetary assumptions. Negative numbers are shown in parenthesis. The forecast projects a range of ending balances with deficits in FY 2025-26 of $(103) million to $(66) million and for FY 2026-27 of $(53) million to a potential surplus of $19 million. The deficits are due to the State's actions to eliminate residential rental sales tax and reduce individual income tax rates, further discussed in this report. The forecast is not intended to precisely predict future GF capacity, but rather to present ranges of potential ending fund balances to be used as a framework for decision making and strategic planning to ensure a balanced budget going forward.
GF 2024-25 Preliminary Budget Status
The FY 2024-25 GF ending fund balance is estimated to be $80 million and is considered one-time funds representing a carry forward of prior year fund balance and savings in GF capital costs. The projected ending fund balance includes significant reductions in revenues caused by legislation passed by the State that eliminates residential rental sales taxes for cities and towns effective January 2025 (SB 1131). The estimated five-month impact to the GF for FY 2024-25 is approximately $(18.4) million and the ongoing annual impact beginning in FY 2025-26 is $(43.4) million. Additionally, SB 1828 reduced individual income tax rates beginning in tax year 2022 to the current "flat tax" rate of 2.5 percent. On June 9, 2023, the State's Joint Legislative Budget Committee (JLBC) notified the legislative membership of a significant decline in GF revenue collections, which is primarily due to underestimating the negative impact of the rate reduction. The City receives state-shared income taxes based on actual collections from two years prior. Budget and Research staff rely on projections from the JLBC to estimate this revenue stream for budget development. The estimated negative impact to FY 2024-25, FY 2025-26, and FY 2026-27 of the less than estimated income tax revenues by the JLBC is approximately $(36) million, $(43) million and $(41) million respectively, compared to projections in the GF Forecast presented to City Council on Feb. 21, 2023.
The GF preliminary estimated resources in FY 2024-25 are $2.096 billion or (1.6) percent lower than FY 2023-24 estimated resources. GF revenue for FY 2024-25 is estimated at $1.843 billion or (3.1) percent lower than the FY 2023-24 revised revenue estimate. Projections account for the reductions mentioned above to city sales tax and state shared revenue. Staff will further refine GF revenue estimates over the coming weeks in preparation for the City Manager's Trial Budget scheduled to be presented to City Council on March 19. More information on each resource category is detailed in Attachment A.
The GF preliminary expenditure projections may change as cost estimates are further refined in the coming weeks; however at this time the preliminary FY 2024-25 GF expenditures to continue existing levels of service are projected to be $2.016 billion, or $1.927 billion excluding contingency funds. This compares to the FY 2023-24 GF expenditure estimate of $1.890 billion. The increase accounts primarily for higher costs for employee salaries and benefits, associated with the City Council approved Classification and Compensation Study, negotiated labor increases and pension costs. 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 2023-24 preliminary GF budget also accounts for increasing the contingency fund from $81 million to $89 million, to reflect 4.75 percent of operating expenditures. In March 2010, the City Council agreed to gradually increase the contingency with a goal of achieving five percent of GF operating expenses. Achieving this goal will improve the City’s ability to withstand potential future economic declines.
GF Multi-Year Forecast
The attached Multi-Year Forecast and Preliminary GF Status Report includes economic, resource and expenditure assumptions (Attachment C) used to develop the forecast. The report also includes possible risks and unfunded needs, including costs necessary beginning in FY 2024-25 to continue efforts helping individuals experiencing homelessness. Additional GF resources will be required for the Office of Homeless Solutions (OHS) upon expiration of American Rescue Plan Act (ARPA) funds with preliminary estimates for FY 2024-25 of $6.5 million and in FY 2025-26 of $22 million. These costs have not been factored into the forecast.
The current forecast assumes no changes to existing labor contracts or service levels, and does not assume any further negative impacts to the City from the current State legislative session. The forecast accounts for anticipated cost increases for operating expenses associated with the voter approved 2023 General Obligation Bond Program in FY 2025-26 and FY 2026-27 totaling $12.8 million over the two fiscal years. Additionally, pension costs are forecasted separately based on information from the City of Phoenix Employees Retirement System (COPERS), and the Public Safety Personnel Retirement System (PSPRS) actuaries, and are anticipated to increase $109 million, or 30 percent from FY 2022-23 to FY 2026-27 (Attachment G).
The multi-year forecast as presented does not assume any period of recession but rather includes a baseline, optimistic and pessimistic projection, based on ranges for revenues and expenditures. As mentioned above, the FY 2024-25 GF ending fund balance is estimated to be $80 million. The outer years of the forecast project a range of ending balances with deficits in FY 2025-26 of $(103) million to $(66) million and for FY 2026-27 of $(53) million to a potential surplus of $19 million. The baseline forecast in FY 2025-26 and FY 2026-27 includes deficits estimated at $(92) million and $(31) million, respectively. The forecast assumes the one-time surplus in FY 2024-25 of $80 million is allocated for one-time purposes rather than spent on ongoing initiatives and therefore is not continued in the following year. The FY 2025-26 deficit is balanced by reducing ongoing expenditures and is not carried over to FY 2026-27. The projected deficits are due to the state’s actions to diminish the ongoing tax base by prohibiting cities and towns from collecting residential rental sales tax and lowering individual income tax rates.
It is important to note the FY 2024-25 GF ending balance if adjusted for the loss of residential rental sales tax and the impact of the less than projected state shared income tax collections would have been estimated at $134 million (versus $80 million). The outer years of the forecast would also be significantly improved absent the loss in revenue with a range in FY 2025-26 of $(17) million to $20 million and projected surpluses of $33 million to $105 million in FY 2026-27 (Attachment B).
Additionally, to better prepare for future challenges, the attached report includes stress testing for moderate and severe recessions, which is an essential fiscal tool to evaluate how revenues respond to different levels of economic crisis. Stress test simulations can help determine if an organization can weather economic shocks or unexpected declines in revenues and is included for illustration purposes only (Attachment D, E and F).
As we look ahead, areas which could impact the GF include revenue volatility, economic declines or a recession, continued pension cost increases, higher costs for employee compensation, impacts from the Department of Justice inquiry, State legislative actions, and unfunded mandates. Staff will continue to monitor legislation, economic conditions and monthly revenue collections closely throughout the budget development process.
Next Steps and Community Engagement
The Phoenix City Charter requires a balanced budget each year. On March 19, a balanced City Manager’s Trial Budget will be presented for City Council and community discussion along with the Preliminary Five-Year Capital Improvement Program (CIP). The CIP is a multi-year plan for capital expenditures that are needed to replace, expand, and improve infrastructure and systems.
Engaging residents in the budget process is a priority of the City Council, and this year staff plans to continue the practice of seeking community input on the proposed budget with several opportunities for residents to participate through community budget hearings to be held during the month of April. Residents are also invited to use the FundPHX tool and can contact the Budget and Research Department directly to provide input on the budget. More information is available on the Budget and Research Department's website, phoenix.gov/budget. Feedback received from residents will be provided to the City Council regularly so it may be considered ahead of final budget adoption.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.