Title
General Fund 2025-26 Preliminary Budget Status and Multi-Year Forecast - Citywide
Description
This report transmits the preliminary status for the General Fund (GF) Fiscal Year (FY) 2025-26 budget and a multi-year GF forecast through FY 2027-28 (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 2025-26 reflects a baseline deficit of $(36) million and projected shortfalls in FY 2026-27 of $(83)M and in FY 2027-28 of $(6)M primarily due to the State's actions to eliminate residential rental sales tax (SB 1311) 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. Phoenix has experienced strong economic growth in recent years and remains an attractive destination to live and work. However, as the attached multi-year forecast (Attachment B) demonstrates, projected structural deficits in FY 2025-26 through FY 2027-28 will require strategic and difficult decision making to ensure the GF budget remains balanced.
The attached Multi-Year Forecast report includes estimates of future GF resources and expenditures for FY 2025-26 through FY 2027-28 based on several economic and budgetary assumptions. Proposed solutions are also included for City Council consideration to balance the future projected budget shortfalls, provide capacity to continue programs and services and add resources for critical needs as detailed further in this report. The forecast projects a range of ending balances with deficits in FY 2026-27 of $(102) million to $(64) million and for FY 2027-28 of $(41) million to a potential surplus of $29 million. The deficits are due to the State's actions referenced above, significant inflationary increases in the cost to provide programs and services, and slowing GF revenues requiring lowering estimated collections in the current fiscal year. 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.
The attached report also includes proposed solutions, including a potential increase of 0.5 percent to the Transaction Privilege Tax (TPT) and Use Tax rate from the current 2.3 percent to 2.8 percent to balance the GF budget (Attachments C and D).
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 FY 2025-26 proposed Trial Budget will be presented to City Council on March 18 and will include a public hearing and possible action for consideration of a TPT and Use Tax increase to offset the State's actions to reduce City revenue and to provide resources necessary to deliver services to the community.
GF FY 2025-26 Preliminary Budget Status
The FY 2025-26 GF ending fund balance is a deficit estimated to be $(36) million. The projected ending fund balance includes significant reductions in revenues caused by elimination of residential rental sales taxes for cities and towns 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 & 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.
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.
The GF preliminary estimated resources in FY 2025-26 are $2.038 billion or (4.9) percent lower than FY 2024-25 estimated resources. GF revenue for FY 2025-26 is estimated at $1.823 billion, which is $3.0 million or 0.2 percent higher than the FY 2024-25 revised revenue estimate of $1.820 million. 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 proposed City Manager's Trial Budget scheduled to be presented to City Council on March 18. 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 2025-26 GF expenditures to continue existing levels of service are projected to be $2.074 billion, including contingency funds. This compares to the FY 2024-25 GF expenditure estimate of $1.951 billion. The increase includes higher costs for employee salaries associated with the City Council approved Classification and Compensation Study, pension and fringe benefit increases, and higher costs for contractual and commodity purchases. These cost increases were partially offset by lower GF costs for capital pay-as-you-go projects.
The FY 2025-26 preliminary GF budget also accounts for increasing the contingency fund from $89 million to $92 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 Baseline Forecast
The attached Multi-Year Forecast and Preliminary GF Status Report includes economic, resource and expenditure assumptions (Attachment D) used to develop the forecast. The report also includes possible risks and unfunded needs, and 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 2025-26 GF ending fund balance is estimated to be a deficit of $(36) million. The outer years of the forecast project a range of ending balances with deficits in FY 2026-27 of $(102) million to $(64) million and for FY 2027-28 of $(41) million to a potential surplus of $29 million. The baseline forecast in FY 2026-27 and FY 2027-28 includes deficits estimated at $(83) million and $(6) million, respectively. The forecast assumes each years deficit is resolved by reducing expenditures to achieve a balanced budget and continued in the following year.
The current baseline 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. Attachment D provides a list of potential bills that if signed into law will have further negative impacts to City revenues. Staff is closely monitoring bills, however potential impacts of proposed bills have not been factored into the GF forecast.
The forecast accounts for anticipated cost increases for operating expenses associated with the voter approved 2023 General Obligation (GO) Bond Program totaling $26 million over the forecast period. 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 $63 million from FY 2024-25 to FY 2027-28 (Attachment H).
The attached report also 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 (Attachments E, F and G).
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. Attachments C and D provides more information and the Multi-Year GF Forecast with the proposed solutions.
Proposed strategies include:
- Increase the Transaction Privilege Tax (TPT) and Use Tax rate 0.5 percent, 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 costs by $24 million (itemized list of reductions will be included in the Trial Budget).
- Use of excise tax bond proceeds to pay for public safety capital purchases totaling $150 million to reduce the up front cost burden to the GF over the forecast period (City Council approval of an excise tax bond sale is scheduled for April 9).
- Set-aside projected one-time amounts in FY 2025-26 of $92 million and in FY 2026-27 of $34 million to achieve a balance budget.
- 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 A.R.S. §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 & Research Department website, and on social media platforms. On February 27, 2025, the City will post the required 15-Day Statutory Notice of Intent to Increase the TPT and Use Tax rates with City Council consideration scheduled for 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/budgetphoenix.gov/budget.
City leadership is evaluating proposed spending reductions for departments, and details on recommendations will be included in the proposed FY 2025-26 Trial 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, purchase apparatus and Medical Response (MR) units 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 major facility and information technology needs (12.5 million).
The above proposed strategies if approved, are estimated to also provide additional resources for the Phoenix Fire Department and Office of Homeless Solutions.
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 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 GO 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 $25 million in GF resources to add sworn and civilian personnel to reduce emergency response times.
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 $5.0 million due to the expiration of American Rescue Plan Act 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 General Fund request.
More details will be provided in the FY 2025-26 Trial Budget scheduled to be presented to City Council on March 18, 2025.
Next Steps and Community Engagement
The Phoenix City Charter requires a balanced budget each year. On March 18, a balanced FY 2025-26 City Manager’s Trial Budget will be presented to City Council. Additionally, the required public hearing will be held for the proposed TPT and Use Tax rate increase ahead of City Council consideration and possible action.
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.