Title
2023-24 Year-End General Fund Budget Results
Description
This report provides an overview of the 2023-24 General Fund (GF) budget results and information on future budget challenges including actions by the State that will negatively impact ongoing revenues. Overall, actual GF resources of $2,138.4 million exceeded estimates by $6.3 million representing a variance of only 0.3 percent. Total actual GF expenditures of $1,844.9 million were $10.6 million under the estimate representing a variance of 0.6 percent. As a result, the GF ending balance of $293.5 million was approximately $16.9 million higher than estimated.
THIS ITEM IS FOR INFORMATION AND DISCUSSION.
Report
Summary
The GF ending balance of $293.5 million exceeded the estimate of $276.6 million by $16.9 million, primarily due to lower than anticipated expenditures discussed further in this report. The fund balance carries forward to the current fiscal year and will be factored into the development of the 2025-26 GF Budget Status.
Two components make up the GF ending balance: resources and expenditures. GF 2023-24 actual resources were $2,138.4 million and exceeded the estimate of $2,132.1 million by $6.3 million, or a variance of 0.3 percent. GF revenues were $1,905.4 million, representing a variance to the revised revenue estimate of only $1.9 million or 0.1 percent. GF expenditures ended the fiscal year at $1,844.9 million, and $10.6 million less than the revised estimate of $1,855.5 million. Attachment A provides graphical illustrations of the GF budget results and Attachment B provides a department by department comparison of 2023-24 GF operating expenditures to the revised estimate.
Over the coming months staff will develop revised resource and expenditure forecasts to prepare a 2025-26 GF Budget Status and Multi-Year Forecast scheduled to be presented to the City Council on February 25, 2025.
2023-24 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 $2,138.4 million for the 2023-24 fiscal year and include a beginning balance of $222.9 million, revenues of $1,905.4 million, recoveries of $8.4 million, and net transfers out of $1.7 million. Total GF resources exceeded estimates by $6.3 million representing a variance of only 0.3 percent. The reason for the variance was higher than anticipated non-tax and state shared vehicle license tax revenues and recoveries from liquidated expenditure encumbrances.
Revenue collections for 2023-24 totaled $1,905.4 million representing a variance to the revised estimate of 0.1 percent and growth over the prior year of 12.6 percent. The primary reason for the strong revenue growth compared to 2022-23 is higher interest earnings, growth in city and state sales taxes and state shared income tax collections which are based on collections from two years prior. 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 2023-24 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 $1,855.5 million, and actual expenditures were $1,844.9 million, or $10.6 million (0.6 percent) less than estimated. The variance is primarily due to less than estimated costs for contractuals, commodities, and additional vacancy savings across several City departments. While expenditures were lower than estimated the City continues to experience significantly higher operating costs for employee wages and benefits including Public Safety Pension discussed later in this report. The City Council approved Classification and Compensation Study, which was a necessary investment in employees to ensure the City is competitive and can attract and retain a top quality workforce to serve residents, also has increased operating expenditures. Additionally, inflation has impacted all City departments across most expenditure categories. Attachment B provides a department by department comparison of 2023-24 GF operating expenditures to the revised estimate.
B&R is underway with the annual 3+9 technical review process, to evaluate spending at the line item level. This deep dive into department budgets will enable 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 2023-24 GF ending fund balance variance of $16.9 million is in "reserve" until the budget status for 2025-26 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 continues to face many fiscal challenges described further in this report 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, and impacts in 2024-25 from the Qasimyar vs. Maricopa County lawsuit requiring property tax refunds due to overpayments by certain property owners.
The State enacted Senate Bill 1131, which prohibits municipalities from collecting sales tax on residential rental property starting January 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 $35.4 million and the ongoing annual impact beginning in 2025-26 is over $85 million. The estimated cumulative impact to all funds beginning in 2024-25 through 2027-28 is $302 million.
The estimated impact by fiscal year and fund for 2024-25 and 2025-26 is listed below:
- 2024-25 (five months) $35.4 million - GF $18.5 million; PSSF $4.6 million; Parks and Preserves $1.5 million; Transportation 2050 $10.8 million.
- 2025-26 (full year) $85.5 million - GF $44.6 million; PSSF $11.2 million; Parks and Preserves $3.7 million; Transportation 2050 $26.0 million.
B&R accounted for this estimated 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 presented to City Council on February 27, 2024. Over the next several months as more sales tax data becomes available staff will update sales tax projections in order to develop the 2025-26 GF Status and Multi-Year Forecast.
Additionally, in 2021 the State enacted 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 entirely to the GF. B&R staff rely on projections from the Joint Legislative Budget Committee (JLBC) to estimate this revenue stream for budget development. This action by the State will result in less ongoing state shared income tax revenue to the General Fund compared to prior projections had the tax rate not been decreased. The JLBC is scheduled to present updated income tax forecasts to the State's Finance Advisory Committee in January, 2025. Staff will update income tax projections based on this information and include estimates in the GF Budget Status and Multi-Year Forecast to be presented to City Council on February 25, 2025.
Further, a judgment by the Maricopa County Superior Court in a class action lawsuit (Qasimyar vs. Maricopa County) ruled that the Maricopa County Assessor's Office incorrectly valued properties when properties transitioned from Class 3 (primary residence) to Class 4 (non-primary residence or rental), or vice versa. The ruling requires refunds of resultant over-collections, retroactive to 2015, totaling $333 million countywide. The County intends to issue all refunds during the 2024-25 fiscal year. The Maricopa County Treasurer's Office estimates a $13 million impact to the City of Phoenix. Staff believe approximately $8 million of this refund will impact the GF, and $5 million to the Secondary Property Tax Fund, however the actual impact will not be known until all refunds have been issued by the County. Staff will include this negative impact to updated estimates for 2024-25 over the next several months as more information becomes available.
Other Budget Challenges and Unfunded Needs
Classification and Compensation Study
The City Council voted unanimously in May 2023 for the City of Phoenix to move forward with the implementation of a multi-year classification and compensation (C&C) study. The results from the study move the City closer to its goal of becoming Arizona's premier public sector employer. The City began the C&C study to not only ensure job classifications and pay structures are aligned with the local municipal market, but to also make the City's pay ranges a local market leader going forward. Setting market-leading pay ranges demonstrates the value the City places on its employees and the community they serve.
As our city continues to grow, evolve, and face the challenges of a dynamic economic environment and competitive labor market it is imperative we address the need for inflationary adjustments to employee salaries in our budget planning and forecasting. This will be necessary for the City to remain a local market leader. Additionally, inflationary pressures have eroded the purchasing power of wages across various sectors, making it increasingly difficult to attract and retain skilled employees who are critical to maintaining high quality services. To stay competitive and ensure our workforce remains motivated and adequately compensated, it is essential to implement strategic market increases that align with the current economic climate. This proactive approach will help us mitigate the risk of wage stagnation and ensure our employees are fairly compensated for their contributions.
Homelessness
The Office of Homeless Solutions (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 are able to continue.
Resources will be needed in 2025-26 for homelessness estimated at $15.3 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 $27.4 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.
Ongoing Operating Costs for the 2023 General Obligation Bond Program
Phoenix voters approved a $500 million General Obligation (G.O.) Bond Program in November 2023 that will provide the resources necessary to build, rehabilitate, expand and enhance City facilities. The program includes resources for fire stations, parks, regional pools and splash pads, libraries, community and senior centers, police stations, affordable housing, arts and culture facilities, streets and storm drains. GF resources will be required beginning in 2025-26 for ongoing operating and maintenance costs for these projects. B&R is in the process of updating ongoing operating cost estimates with departments but based on information provided last fiscal year estimates range from $2.2 million in 2025-26; $10.7 million in 2026-27; $18.4 million in 2027-28; and $25.4 million annually starting in 2028-29.
Other budget challenges beyond the aforementioned include:
- Rising employee benefit costs, particularly for Public Safety pension and health care;
- Additional funds necessary to continue 32 sworn Firefighter positions due to the expiring 2021 SAFER grant;
- Potential budgetary impacts from the Department of Justice investigation of the Police Department;
- Major facility maintenance needs and rising costs to repair and replace vehicles and equipment;
- Increased funding needs for critical IT projects for public safety and criminal justice support;
- Additional resources to adequately fund City trust accounts including Workers Compensation, Self Insurance Reserve and Long Term Disability;
- Challenges estimating revenue collections in the current economic and global climate;
- Demands from residents for additional or new GF services; 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 2025-26 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, 2024, actuarial valuation will be provided to the City in December and will be used to develop the GF 2025-26 Budget Status and Multi-Year Forecast. Attachment C includes historical and forecasted GF public safety pension costs based on the most recent estimates from the PSPRS actuary.
2025-26 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 (Attachment D) 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 will request formal action to approve the budget calendar at the November 13 Formal City Council meeting.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.