Title
2022-23 Year-End General Fund Budget Results and 2024-25 Budget Calendar
Description
This report provides an overview of the 2022-23 General Fund (GF) budget results, information on future budget challenges including recent actions by the state that will negatively impact revenues, and a request to adopt the 2024-25 budget calendar. Overall, actual GF resources of $1,846.7 million exceeded estimates by $14.8 million representing a variance of 0.8 percent. Total actual GF expenditures of $1,623.8 million were $4.0 million under the estimate representing a variance of only 0.2 percent. As a result, the GF ending balance of $222.9 million was approximately $18.8 million higher than estimated.
THIS ITEM IS FOR DISCUSSION AND POSSIBLE ACTION.
Report
Summary
The GF ending balance of $222.9 million exceeded the estimate of $204.1 million by $18.8 million, primarily due to higher than anticipated revenue collections discussed further in this report. The fund balance carries forward to the current fiscal year and will be factored into the development of the 2024-25 GF Budget Status.
Two components make up the GF ending balance: resources and expenditures. GF 2022-23 actual resources were $1,846.7 million and exceeded the estimate of $1,831.9 million by $14.8 million, or a variance of 0.8 percent. Higher than anticipated revenue collections contributed to the GF ending balance. GF revenues were $1,692.9 million, representing a variance to the revised revenue estimate of $32.5 million or 2.0 percent. The increased revenue collections were partially offset by increased net transfers primarily to the City's Debt Service Reserve Fund to ensure resources are available for future expected debt service payments. GF expenditures ended the fiscal year at $1,623.8 million, and $4.0 million less than the revised estimate of $1,627.8 million. The GF expenditure variance is primarily due to less than estimated expenditures for capital pay-as-you-go projects. Attachment A provides graphical illustrations of the GF budget results and Attachment B provides a department by department comparison of 2022-23 GF operating expenditures to the revised estimate.
Over the coming months staff will develop revised resource and expenditure forecasts to prepare a 2024-25 GF Budget Status and Multi-Year Forecast scheduled to be presented to the City Council on Feb. 27, 2024.
2022-23 General Fund Results
Resources
Total resources include:
- Beginning fund balance;
- Annual revenue;
- Recoveries of prior year encumbrances that were not spent; and
- Interfund transfers to/from other City funds.
As mentioned above, GF resources were $1,846.7 million for the 2022-23 fiscal year and include a beginning balance of $224.4 million, revenues of $1,692.9 million, recoveries of $4.3 million, and net transfers out of $74.9 million. Total GF resources exceeded estimates by $14.8 million representing a variance of only 0.8 percent. The reason for the variance was higher than anticipated revenue collections primarily in city sales taxes, offset by lower than estimated net transfers.
Revenue collections for 2022-23 totaled $1,692.9 million representing a variance to the revised estimate of 2.0 percent and growth over the prior year of 13.2 percent. The City has benefited from a growing economy, and higher inflation from a revenue standpoint, as the price of taxable goods has increased, coupled with strong consumer spending. However the pace of growth is beginning to slow particularly in the retail sales tax category for both city and state sales tax which is the largest tax base. Over the past year the Federal Reserve has significantly increased interest rates to lower inflation causing economists to speculate about the possibility of a recession or slowdown at some point in the future. Budget and Research (B&R) staff work diligently to analyze revenue data and economic conditions throughout the fiscal year. Sales tax is forecasted using our econometric model developed in partnership with the University of Arizona's Economic and Business Research Center. Additionally, staff closely follow information provided by our trusted economic sources, which are taken into account to project revenues. It is for these reasons that year after year, revenues end the fiscal year close to what was estimated. Staff has taken a cautious approach to estimating revenue and will continue to do so in order to ensure projections are not too aggressive. The 2022-23 Year End GF revenue report is available online at phoenix.gov/budget and provides further details on revenue collections.
Expenditures
Total GF expenditures were estimated at $1,627.8 million, and actual expenditures were $1,623.8 million, or $4.0 million (0.2 percent) less than estimated. The variance is primarily due to carryover savings in GF capital pay-as-you-go projects for the Lower Buckeye Shelter project, Roadway Safety Action Plan, Information Technology Plan, and facilities major maintenance projects all originally planned for 2022-23 that will instead occur in 2023-24. Moreover, the City is experiencing higher operating costs for employee wages and benefits, contractual and commodity expenses, and capital outlay due to inflation and negotiated pay increases. In 2022-23, these increased costs were accounted for and offset by additional vacancy savings.
B&R is underway with the annual salary and benefits projection review process, which accounts for the recent significant investment in City employees via labor agreement increases and costs to implement the Class and Comp study. This investment in employees was necessary to ensure the City is competitive, to lower vacancy rates, and to attract and retain a top quality workforce to serve residents. In October and November, all departments will work closely with B&R staff to start on the technical expenditure review process to evaluate spending at the line item level. This deep dive into department budgets will enable B&R staff to identify savings and establish realistic estimates necessary to continue existing programs and services. The process is followed by the central review process in December, which involves estimating costs for various commodities such as fuel and electricity and personnel services line items, particularly pension. Revenue estimates will also be updated during this time. These budget processes are critical steps in development of the GF Budget Status to be presented to City Council in February.
Looking Forward
The 2022-23 GF ending fund balance variance of $18.8 million is in "reserve" until the budget status for 2024-25 is developed over the next several months. The higher than anticipated ending fund balance is good news and will be beneficial as we move forward. However, the City faces many fiscal challenges in the years ahead which will require strategic and difficult decisions to ensure the budget remains sustainable and balanced. Of primary concern are the state's actions to diminish the tax base for both city sales tax and state shared income taxes which will have an ongoing negative impact to revenues.
The state recently enacted Senate Bill 1131, which prohibits municipalities from taxing residential rental property starting Jan. 1, 2025. This action by the state to eliminate an ongoing city revenue stream will have a significant negative impact to the GF, Public Safety Specialty Funds (PSSF), Parks and Preserves, and Transportation 2050 Funds. The total estimated impact for 2024-25 is approximately $36.4 million and the ongoing annual impact beginning in 2025-26 is over $90 million. The estimated accumulative impact to all funds beginning in 2024-25 through 2027-28 is $318 million.
The impact by fiscal year and fund for 2024-25 and 2025-26 is listed below:
- 2024-25 (five months) $36.4 million - GF $19.0 million; PSSF $4.7 million; Parks and Preserves $1.6 million; Transportation 2050 $11.1 million
- 2025-26 (full year) $90.2 million - GF $47.1 million; PSSF $11.8 million; Parks and Preserves $3.9 million; Transportation 2050 $27.4 million
B&R will account for this negative impact in development of excise tax revenue estimates for the 2024-25 Proposed Budget and in the GF Budget Status and Multi-Year Forecast scheduled to be presented to City Council on Feb. 27, 2024. Staff will also work closely with the Public Safety departments, Parks and Recreation, Public Transit and Street Transportation to identify impacts going forward to operating and capital budgets from the elimination of residential rental sales taxes.
Additionally, on June 9 the State's Joint Legislative Budget Committee (JLBC) notified the legislative membership (Attachment C) of a significant decline in General Fund revenue collections. The decline is primarily due to underestimating the negative impact of the state's decision in 2021 to enact Senate Bill 1828 which reduces individual income tax rates beginning in tax year 2022. The City receives state shared income tax based on actual collections from two years prior and is distributed to the GF. B&R staff rely on projections from the JLBC to estimate this revenue stream for budget development. The estimated negative impact to 2024-25 of the less than estimated income tax revenues by the JLBC is approximately $36 million compared to projections in the GF Five Year Forecast presented to City Council on Feb. 21, 2023. The JLBC is scheduled to present updated income tax forecasts to the State's Finance Advisory Committee in October and January. Staff will update income tax projections based on this information and include estimates in the GF Budget Status and Multi-Year Forecast.
Other budget challenges beyond the ongoing revenue reductions from the state's actions include:
- Ensure resources are sufficient to pay for long term budget impacts from the City Council approved Class and Comp study;
- Rising employee benefit costs, particularly for Public Safety pension and health care;
- Additional resources to adequately fund City trust accounts including Workers Compensation, Self Insurance Reserve and Long Term Disability;
- Deferred maintenance and aging infrastructure such as vehicles, equipment, and City facilities;
- Increases in expenses for replacing and protecting City information technology assets;
- Demand for additional or expanded GF services;
- Potential budgetary impacts from the Department of Justice investigation of the Police Department;
- Potential new ongoing operating costs from the proposed 2023 General Obligation Bond Program;
- Challenges estimating revenue collections in the current economic climate; and
- Potential reduction in state and federal funding or new unfunded state or federal mandates, including environmental requirements and attempts by the legislature to further reduce taxes.
The items above add significant pressure and uncertainty to the GF operating budget and create challenges estimating revenues and expenditures. Staff will be working over the next several months to study data trends, gather updated economic information, and complete our necessary budget development steps in order to construct the GF 2024-25 Budget Status and Multi-Year Forecast.
It is important to mention that Phoenix's public safety pension costs will continue to increase for the foreseeable future based on information B&R staff received from the Public Safety Personnel Retirement System (PSPRS) actuary. Updated pension rates from the June 30, 2023, actuarial valuation will be provided to the City in December and will be used to develop the GF 2024-25 Budget Status and Multi-Year Forecast. Attachment D includes historical and forecasted GF public safety pension costs based on the most recent estimates from the PSPRS actuary.
2024-25 Budget Calendar
The City Charter and Code include legal deadlines and actions that must be followed in adopting the budget. In cases where the deadlines conflict, the City meets the earlier of the two dates or a date designated by the City Council. Adoption of the budget calendar ensures compliance with the City Charter and Code, and also allows staff to properly plan the budget development process and all legally required advertising. Staff requests City Council approval of the 2024-25 budget calendar reflected in Attachment E.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.