Payson spent two years digging a budget hole.
At Tuesday’s budget study session, the council pondered the cost of putting aside the shovel.
A steepening slide in sales tax collections brought on by the national economic downturn has compounded the impact of previous freewheeling spending, overly optimistic projections, unanticipated costs and flat out mistakes, creating a perfectly awful budget storm.
The council’s unpalatable options included borrowing money from the water department, laying off 6-7 full-time employees and more than 120 part-time workers, shutting down town hall on Fridays, toughening an ongoing hiring freeze, canceling landscaping and building maintenance contracts and eliminating virtually all the remaining capital improvement projects. The cuts would trim overall spending by $4.5 million to stay within newly projected revenues of $23.5 million down from $28 million.
The tentative plan would keep the swimming pool open this summer, but might force the shutdown of many other recreation programs — which have nearly doubled in use in the past two years.
Even if the town borrowed $300,000 from the still-flush water department to avert laying off full-time town workers, “that does not guarantee there won’t be layoffs,” said Payson Town Manager Debra Galbraith.
Councilor Su Connell said “it’s going to take us multiple years to get back flush, which makes me concerned about taking money from one pocket and juggling it around. We’re at the mercy of multiple agencies — this isn’t a pleasant place to be.”
“I don’t believe we can borrow ourselves out of debt,” said Councilor Richard Croy, in reaction to the suggestion the town could limp through without layoffs by borrowing some of the millions of dollars the water fund has stockpiled to eventually build a pipeline from the Blue Ridge Reservoir.
Numbers could be worse
“We could stick our heads in the sand,” said Mayor Kenny Evans, “but a prudent person would assume the numbers to come will be worse. What we’re trying to do is get ahead of the curve. We’re not alone in this, but that’s not much comfort.
Councilor Mike Vogel said, “this isn’t what I signed on to do — but I’m responsible because I not only voted for this year’s budget, I voted for last year’s budget. I didn’t do my due diligence,” said Vogel. “We messed up.”
Last year the town consumed nearly $3 million in reserves when revenues flattened instead of rising nearly 15 percent, as projected when the previous council adopted the budget in June of 2007. The council did not receive financial updates as the deficit grew and dug the hole deeper by approving new spending throughout the year. The new council took office just in time to adopt this year’s budget, which had almost nothing in the reserve fund. That $28-million budget assumed a 10-percent decline in general fund revenue and a 26-percent decline overall.
But instead of leveling off, the decline in sales taxes and building fees has grown worse in the past two months.
Overall, projections based in part on guesswork suggest the town will take in only $23.6 million in the fiscal year that ends in July, about 16 percent less than the projected 10-percent drop.
Galbraith presented two alternative budget plans, which were in turn based on a trend line modeled on the four most recent recessions, said Evans.
In one plan, the $300,000 loan from the water department would avert the need for the layoff of up to 7 full-time employees.
Both plans call for cutting $3.3 million from the capital improvement budget, including the $800,000 purchase of land near the airport and $1.1 million to rebuild Bonita Street.
However, the grim session on Tuesday focused mostly on how to cover a projected $1 million shortfall in the $11.7 million general fund.
Tax revenues have come in $2.3 million below projections for the first four months of the year, a decline of 28 percent, said Evans.
However, that number is misleading. Most of the shortfall represents a cash flow problem more than a bottom-line issue. For instance, that shortfall includes $213,000 in late payments of property taxes from the county, $100,000 in late payments on franchise fees, $500,000 for a grant not yet received and $564,000 not yet returned to the town for employee insurance contributions.
Moreover, mistakes scattered throughout the adopted budget complicated the effort to calculate the real shortfall.
For instance, the town council voted on a budget that projected $6.5 million in sales tax revenue. However, the town finance staff mistakenly submitted to the state a $7 million estimate. As a result, the projections show the town $800,000 behind in sales taxes. In fact, projections suggest sales taxes will ultimately come in $275,000 less than the amount included in the budget approved by the council.
Evans prepared a budget revenue summary that took into account the timing of various late payments from the state, the county and other entities. Those corrections softened the stark 28 percent shortfall included in the raw numbers for the past four months. In fact, the estimate puts the actual shortfall at about 6 percent or $543,000 so far.
Shortfall estimate $1.6 million
If the steep declines in the past two months continue, with a modest turn upward in the third quarter of the fiscal year, the shortfall the town will have to cover with cuts in the general fund should come at an estimated $1.6 million, said Evans.
Several factors have added to the problems created by the shortfall. Unanticipated items included the $40,000 in projected expenses for the YMCA referendum, $50,000 to cover new state charges for the crime lab, $177,000 the state cut from gas tax money previously promised to the town and $40,000 to pay off vacation and sick time for retiring employees.
In addition, the state has asked the town to return $75,000 it gave the town last year. Payson has joined with other members of the League of Arizona Cities and Towns to block that request. The revised budget plan still includes the $75,000 refund to the state.
Several other factors could cushion the blow — and perhaps avert some of the cuts.
The town is negotiating with the Tonto Apache Tribe to provide police services on reservation land, which would bring several hundred thousand dollars in added revenue to the police department.
In addition, Payson is continuing discussions with Star Valley about a proposal to continue providing police services for its neighbor. Currently, Star Valley pays about $260,000 annually to have Payson officers respond to calls. Payson officials have said they might renew the existing contract for a substantially higher amount, citing the cost of covering the town’s liability in providing police protection.
Those contracts could provide some relief for the police budget. Currently, the department has three vacancies for sworn officers. Two senior officers plan to retire in the next few months.
The police and fire departments were both exempted from the hiring freeze on filling vacancies in the current fiscal year in the just-presented plan. The outcome of the negotiations with the tribe and Star Valley could play a role in whether the town can afford to fill the two vacancies due to anticipated retirements, said Evans.
Most of the discussion in the study session focused on whether to borrow money from the water department to avert layoffs — and whether the elimination of an estimated 120 part-time employees would affect many recreation programs.
The town would have to repay the money borrowed from the water department at a cost of $6,500 to $9,000 a month over the next three or four years.
Without that loan, Galbraith said that six or seven layoffs would save $214,000 in the current year and more next year. The town would have to pay for the vacation time and half the unused sick time in a lump sum, which reduces the budget savings in the first year.
Galbraith’s memo indicated the decision would be based on the workload in each department and on the individual employee’s contributions, including if they were “not up to the challenge of the position they hold…not willing to work as needed within a small department…and not creating a good image as a town employee.”
The memo also said higher paid employees would be first in line for the layoff, including managers, providing they met the other criteria based on performance and department workload.
Many cities and towns and the state have personnel rules that prevent the use of performance-based criteria as the basis for budget-based layoffs. Such rules normally lay out the procedures for firing an employee for poor performance.
Evans said the personnel rules for the town give the town manager much wider latitude “to consider workload, management capacity and mission-critical criteria” in making layoffs.
Galbraith did not list specific layoffs at the study session, saying she first wanted to determine whether the council would consider the water department loan.
However, she presented lists of cuts under each of the two plans. The only difference between the two lists was the roughly $200,000 savings from the layoff of full-time employees.
The layoff plan plus other adjustments created savings of $55,000 in the town manager’s office, $45,000 in financial services, $87,000 in police operations, $62,000 in fire operations, $50,000 in parks administration, $61,000 in the planning department, and $53,000 in the building department.
Most of the council members who commented during the study period expressed doubts about the water department loan.
With the seats for the audience filled with anxious town employees, Vogel pressed Galbraith for a recommendation on which plan the council should adopt.
“Which one do you like?” asked Vogel.
“I don’t like either of them,” said Galbraith. “From an accounting standpoint,” she began, before pausing to compose herself before continuing.
“I think we’re going to have to go with the layoffs.”
Evans said “my observation is that politicians at all levels have become addicted to deficit spending about like drug addicts become addicted to drugs. We should not let ourselves fall into that trap.”
However, he stressed that even if the council approves the layoff plan, people wouldn’t actually be let go until January. Fresh revenue projection, new plans and action on things like the police contracts and the lawsuit involving the state could change the picture before then.
Galbraith added that the town staff will work on reacting to the changing economy with timely projections, financial updates and development of a real rainy day fund. “We will put in place systems so this will never happen again,” she said.
PLANNED CUTS - INCLUDING LAYOFFS
•$51,000 – close town offices on Fridays (except police and fire)
•$26,500 – 50 percent cut in the budget to recruit new businesses
•$214,000 – Lay off 6-7 full-time employees
•$325,000 – Eliminate part-time and seasonal employees
•$109,000 – Eliminate staff travel
•$69,000 – Cut in $425,000 finance budget
•$74,000 – Cut in $297,000 town manager budget
•$43,000 – Cut in $212,000 magistrate court budget
•$428,000 – Cut in $4.7 million police budget, including $87,000 for personnel, $250,000 to delay purchase of a computer program and $105,000 to lease three new police cars
•$88,000 – Cut in $2.6 million fire department budget
•$702,000 – Cut in streets, including roundabout and maintenance
•$250,000 – Cancel improvements along the American Gulch
•$1.1 million – Cancel Bonita Street rebuild
•$800,000 – Cancel airport land purchase
•$141,000 – Cancel work on trails system
•$271,000 – Cut in $1.1 million parks department,
•$140,000 – Cut in water department budget.
•$175,000 – Cut in $887,000 planning department budget.
•$218,000 – Cut in contract for landscape and janitorial service
•$274,000 – Cut in budget for supplies