Title
General Fund 2026-27 Preliminary Budget Status and Multi-Year Forecast - Citywide
Description
This report transmits the preliminary status for the General Fund (GF) Fiscal Year (FY) 2026-27 budget and a multi-year GF forecast through FY 2028-29 (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 2026-27 reflects a projected surplus and includes resources that can be used for ongoing and one-time purposes. After taking into account required resources for operational and financial continuity of $93 million further described in this report, the remaining surplus is $62 million and includes $36 million in ongoing resources and $26 million in one-time resources. This positive budget outlook reflects the City Council's leadership last year to adopt the budget balancing strategies recommended by staff to resolve projected deficits including increasing the Transaction Privilege Tax (TPT) and Use Tax rate from 2.3% to 2.8% to offset the negative impacts of State action to eliminate residential rental sales tax and implementation of the flat income tax.
While the outlook for FY 2026-27 is positive, continuing uncertainty remains over the State's resolution to income tax conformity with the One Big Beautiful Bill. Decisions on conformity will impact the City's state-shared income tax revenues beginning in FY 2027-28. Due to this uncertainty, staff has prepared two versions of the multi-year forecast for comparison purposes (Attachments B and C). Attachment B reflects the baseline forecast, which does not reflect any tax conformity reductions. Attachment C assumes full tax conformity, which reduces state-shared income tax revenues by $21.5 million in FY 2027-28 and by $16.7 million in FY 2028-29. Additionally, staff continues to closely monitor state legislative proposals, several of which would significantly negatively impact City revenues if signed into law and represent a risk to the forecast.
The attached multi-year forecast report includes estimates of future GF resources and expenditures for FY 2026-27 through FY 2028-29 based on several economic and budgetary assumptions. The baseline forecast (Attachment B) projects a range of ending balances, with a potential deficit of $(6) million to a potential surplus of $36 million in FY 2027-28 and a potential deficit of $(31) million to a potential surplus of $47 million in FY 2028-29. The forecast reflecting full tax conformity (Attachment C) also projects a range of ending balances, with a potential deficit of $(7) million to a potential surplus of $35 million in FY 2027-28 and a potential deficit of $(48) million to a potential surplus of $30 million in FY 2028-29. These forecasts are 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.
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. These projections will then be used to guide the FY 2026-27 proposed City Manager's trial budget, which is scheduled to be presented to City Council on March 24.
GF FY 2026-27 Preliminary Budget Status
The projected positive ending fund balance in FY 2026-27 is good news and is primarily due to additional revenue generated from the TPT rate increase from 2.3% to 2.8% effective July 2025. The increase was necessary to offset the ongoing revenue losses caused by the State's action to eliminate residential rental sales tax effective January 2025 and to lower the individual income tax rate to a flat tax of 2.5 percent effective in tax year 2022. It also reflects the Council approved set-aside of the projected $17 million surplus from last year's budget and $11.6 million in carryover fund balance from FY 2024-25. Additionally, Budget and Research staff worked closely with departments to identify savings through the 3+9 technical expenditure review process, which frees up additional resources and benefits the fund balance.
As discussed last fiscal year, ongoing resources totaling approximately $18 million are required in FY 2026-27 to continue services for the Office of Homeless Solutions to provide services to individuals experiencing homelessness in our community due to the expiration of American Rescue Plan Act funds; and for the Parks and Recreation Department to add positions for Esteban Park included in the 2023 General Obligation Bond Program and Lone Mountain Park both expected to be fully operational by FY 2027-28. Additionally, $75 million of one-time resources is recommended to be set-aside to balance FY 2027-28 to ensure continuation of existing programs and services. The remaining FY 2026-27 surplus of $62 million is made up of $36 million in ongoing resources and $26 million in one-time funds. The proposed City Manager's trial budget presented on March 24 will make recommendations on how to allocate the surplus, which could be used for new programs and services for the community and negotiated labor increases.
The GF preliminary estimated resources in FY 2026-27 are $2.289 billion, which is 4.5 percent higher than FY 2025-26 estimated resources. GF revenue for FY 2026-27 is estimated at $1.987 billion, which is $65 million or 3.4 percent higher than the FY 2025-26 revised revenue estimate of $1.922 million. These projections reflect modest economic growth and the ongoing effect of the TPT rate increase. They also reflect the negative impact to state-shared revenues from the incorporation of San Tan Valley, which reduces state-shared revenues by more than $10 million in FY 2026-27. Revenue projections also reflect lower state-shared income tax collections due to the flat income tax and the elimination of residential rental sales tax. Staff will further refine GF revenue estimates over the coming weeks in preparation for the proposed City Manager's trial budget. 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 2026-27 GF expenditures to continue existing levels of service are projected at $2.134 billion, including contingency funds. This compares to the FY 2025-26 GF expenditure estimate of $1.944 billion. The increase includes higher costs for employee salaries, which continue to reflect the ongoing impact of the Classification and Compensation Study. Public Safety pension costs also continue to rise, with projected FY 2026-27 costs almost $16 million higher than the FY 2025-26 budget. Notably, civilian pension costs are forecasted to remain flat throughout the forecast, highlighting the positive impact of prior pension reforms and continued progress in paying down the unfunded liability. Other cost increases include higher fringe benefit costs and increases for contractual, commodity, and vehicle replacement costs. These increases are partially offset by lower GF costs for capital pay-as-you-go projects.
The FY 2026-27 preliminary GF budget also accounts for increasing the contingency or "rainy day" fund from $92 million to $94 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. It does not assume any period of recession but rather includes a baseline, optimistic, and pessimistic projection, based on ranges for revenues and expenditures. The forecast assumes any annual deficit is resolved by reducing the following year's expenditures to achieve a balanced budget, as the City is required by City Charter XVIII Section 6 and Arizona Revised Statute 42-17151 to pass a balanced annual budget each year.
The baseline multi-Year Forecast (Attachment B) includes a range of ending fund balances to account for additional uncertainty with projections further out in the forecast period, with a potential deficit of $(6) million to a potential surplus of $36 million in FY 2027-28 and a potential deficit of $(31) million to a potential surplus of $47 million in FY 2028-29. The baseline forecast reflects surpluses of $15 million and $8 million in FY 2027-28 and FY 2028-29, respectively and requires a set-aside of $54 million to balance FY 2027-28. The forecast reflecting full tax conformity (Attachment C) also projects a range of ending balances, with a potential deficit of $(7) million to a potential surplus of $35 million in FY 2027-28 and a potential deficit of $(48) million to a potential surplus of $30 million in FY 2028-29. This forecast reflects a surplus of $14 million and a deficit of $(9) million in FY 2027-28 and FY 2028-29, respectively and requires a set-aside of $75 million to balance FY 2027-28.
The current baseline forecast assumes no changes to existing labor contracts or service levels. It also 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 and presents a risk to projections. Staff will continue to closely monitor these bills.
The forecast accounts for anticipated cost increases for operating expenses associated with the voter-approved 2023 General Obligation Bond Program, totaling $29 million over the forecast period. It includes annual investments of $21 million toward addressing critical City facility and capital equipment maintenance needs. It also reflects efforts to reduce the City's vehicle backlog by allocating additional resources to vehicle replacements, beginning with $28 million in FY 2026-27 and increasing to $44 million in FY 2028-29. Additionally, pension costs are forecasted separately based on information from the City of Phoenix Employees Retirement System and the Public Safety Personnel Retirement System actuaries. These costs are anticipated to increase $46 million from FY 2025-26 to FY 2028-29 (Attachment H).
Finally, 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 (Attachments E, F and G).
Next Steps and Community Engagement
On March 24, a balanced FY 2026-27 City Manager’s Trial Budget will be presented to City Council, along with the Preliminary Five-Year Capital Improvement Program. Engaging residents in the budget process is a priority of the City Council, and staff will continue the practice of seeking community input on the proposed budget with multiple opportunities for residents to participate through community budget hearings, scheduled for late March through mid-April. Residents are also invited to 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 for consideration ahead of final budget adoption.
Department
Responsible Department
This item is submitted by City Manager Ed Zuercher, Deputy City Manager Amber Williamson and the Budget and Research Department.