Phoenix City Manager Ed Zuercher has proposed both raising taxes and spending more as the city wrestles with one of the most complicated set of fiscal hurdles it has seen in years.
On the surface, Phoenix’s budget outlook for the next year appears tranquil, with the forecast of a $60 million surplus that could roll back cuts to employee pay and benefits, equip police officers with body cameras and fund other programs.
All of that, however, may come with a controversial price tag: Higher property taxes for homeowners.
Zuercher released his proposed budget for the upcoming fiscal year on Thursday. His plan calls for increasing taxes so the city can keep up with debt payments on bond projects without cutting services or gobbling its one-time surplus.
“What I’m saying is that I believe that for the price of a cup of coffee at a local coffee shop per month,” Zuercher said, “you get great services from enthusiastic employees and even some new things and some important things that people have said we really need to have.”
A “cup of coffee” is how Zuercher described the impact of the proposed property-tax rate hike, which would cost an average Phoenix homeowner about $4.25 more per month, or $51 per year. If approved by the City Council, it would be the city’s first rate increase since 1995.
Zuercher’s budget proposal, also known as the trial budget, is a first step toward creating a spending plan for the fiscal year that starts July 1. Details of his $1.22 billion operating budget will be debated as the city holds public hearings over the next month and council members prepare to vote later this spring.
Tax hike sought despite surplus
One of most hotly-debated aspects of Zuercher’s budget likely will be the prospect of raising taxes while the city has a surplus — and he anticipates more spending.
The surplus comes despite soaring employee-pension costs and concerns about the balance of the city’s property-tax reserve fund. Zuercher said the surplus is largely the result of moves that created one-time savings, such as not filling vacant positions and the sale of police helicopters. Overall revenue to the city’s operating budget is also now above the pre-recession peak.
A few council members who’ve spoken out about property taxes are likely to oppose a rate hike, especially given the city’s plan to increase spending. Among them is Councilman Jim Waring, a fiscal conservative.
“Raising taxes to either expand programs or create new programs and to give pay raises while pension costs are inexorably rising dramatically year after year is a recipe for disaster,” Waring said. ” ‘Responsibility’ is just not the word I would use for this.”
Two members of the council’s more liberal-leaning majority, Mayor Greg Stanton and Vice Mayor Kate Gallego, declined to comment on the substance of Zuercher’s proposal until they’ve heard from residents at the city’s budget hearings.
Why increase property-tax rates now?
Phoenix has kept its property-tax rate steady for about 20 years, a move that allowed many homeowners to pay less in taxes to the city when their property valuations fell during the recession. Valuations have started to climb back up in the last two years.
However, Zuercher said the status quo needs to change so the city can make its debt payments for bond projects.
A reserve fund that allowed the city to avoid raising property-tax rates or cutting its budget more during the past six years is almost gone. That reserve had a large surplus from the housing boom, so the city had money it could use to make debt payments on bond projects. At the same time, the city shifted more property-tax revenue to pay for operating costs.
Chief Financial Officer Denise Olson said if nothing changes, that reserve could dip below its recommended “minimum balance” of $75 million in the next year. She said that could negatively affect the city’s credit rating, and make it more expensive to borrow money.
Phoenix has two types of property taxes: A primary property tax, which pays for day-to-day operating expenses, such as police, fire and parks; and a secondary property tax, which pays the city’s debt on voter-approved bond projects, such as the city’s convention center or various infrastructure projects.
City property taxes make up a portion of a typical homeowners’ bill. While the city has not increased rates for two decades, other jurisdictions, such as Maricopa County and school districts, have increased their rates, causing many residents’ overall property-tax bills to go up.
Zuercher said if the city doesn’t raise its property-tax rate, it will be forced to use more of its tax revenue to repay bonds and less to pay operating costs.
That means the city would have to cut about $37 million from city services in the next fiscal year, he said. The proposed budget outlines about $44 million in potential cuts that residents and council members could pick from if they choose not to increase the property-tax rate, including eliminating police and fire personnel, slashing library hours and shuttering senior centers and swimming pools.
Alternatively, Zuercher said council members could increase taxes in other ways, including creating a food tax, increasing sales tax or adding a tax to water bills.
Zuercher said if council members decide not to increase any taxes, they could use the city’s surplus to cover its debt payments for bond projects for the next year or two and face a similar dilemma after that, or permanently cut the city’s operating budget by $37 million. City officials said those two options may negatively affect Phoenix’s credit rating.
Spending increases proposed
Meanwhile, Zuercher proposes the city use most of its $60 million surplus to restore a portion of the compensation cuts city employees took over the past six years. Such pay and benefit “restorations” would cost about $44 million.
Union leaders have said the city should make whole those employees who sacrificed to help the city balance its budget in tough times. They’ve called for Phoenix to roll back a 4.2 percent compensation cut that’s still in effect for employees, from police officers to office workers and landscapers.
Zuercher’s budget would set aside money to give back 2.6 percent of those cuts over the next two fiscal years. He said he’s concerned about employee morale and turnover, as well as the city’s ability to attract new workers.
“We’re in the service business and when you’re in the service business, you’re only as good as your employees are,” Zuercher said. “Part of how good your employees are is their satisfaction level with doing their work.”
Phoenix is negotiating new contracts with its labor groups, talks that are in mediation after reaching an impasse. Zuercher’s proposal is based on the city’s latest offer to those employee groups, but council members have final approval over contracts for the city’s five major unions.
In addition to employee compensation, Zuercher had proposed increasing spending in other areas. Among the proposed increases:
- Equip the police department with body cameras over the next three fiscal years. Body cameras have been a priority for some residents and council members. Cost: $11 million.
- Implement an electronic patient-records system for the Fire Department. Zuercher said Phoenix is the only major Valley city that keeps paper records. Cost: $2.8 million.
- Repair and replace the road and public-safety radio tower at North Mountain. City officials said the road is failing and the radio tower is obsolete. Cost: $1 million per year for up to 10 years.
Additional Reading: The Arizona Republic
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