Towns Face Many Tough Revenue Years Ahead

State planners predict Payson, Star Valley may not regain 2005 revenue totals until 2013

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The good news: Arizona’s economy will limp through fiscal 2010 with some recovery beginning in 2011.

The bad news: Towns may spend two more years just getting back to where they were in 2005 after next year absorbing a projected 25-percent decrease in state shared revenue derived from income tax collections, according to the Joint Legislative Budget Committee (JLBC).

What does this mean to towns like Star Valley and Payson?

Town managers from both towns predict additional spending cuts and spending limits, even though economists say the nation’s economy has already resumed growing. Both towns have all but eliminated capital improvement projects and limited or frozen new hiring. Payson had to borrow money from its water department to create even a razor-thin reserve for the current year. In the meantime, Star Valley is struggling to cope with a drop in revenue from speeding tickets — which last year provided half of the town’s revenue.

The state’s projections suggest that both towns will have to live on starvation rations for several more years — even with some economists saying the recession has officially ended. State budget planners say towns may not match their 2005 revenues until 2013.

In a report to the Finance Advisory Committee, the JLBC said Arizona is experiencing its greatest two-year loss in its general fund revenue in modern times. Moreover, fiscal year 2010 revenues will need to grow by almost 1 percent for the state to balance its projected $7-billion budget.

However, tax collections have continued to decline — off $233 million in the first three months of the fiscal year that started in June.

In fact, the JLBC projects a 7.2-percent consensus decline in fiscal year 2010, with 7.8 percent growth in fiscal year 2011 which starts next June.

“National economic recovery is expected to pull the Arizona economy along,” the JLBC said in its presentation. “Retail sales will increase as a result of some pent up demand built up during the downturn.”

Sales tax collections are expected to decline 7.7 percent in fiscal year 2010, with some growth returning in 2011. Despite a predicted 6-percent growth in sales tax collections in 2011, collection levels will not rebound to 2006 levels until 2013.

The same prediction holds for individual income tax and corporate income tax levels. Forecasters predict a 4.5-percent drop in the current fiscal year, with an increase in 2011.

Corporate income tax should decline 15.5 percent in 2010 before inching back upwards. However, even in 2013, projected income tax collections will remain below 2005 levels.

Towns will take a big hit with the decrease in urban revenue sharing, through which the state doles out a share of the income tax revenue.

In fiscal 2011, projected revenue sharing will decrease by $155 million or 25 percent from the current fiscal years’ total.

“This comes on the heels of a nearly 13-percent decline from the previous fiscal year,” the League of Arizona Cities and Towns said in a press release. “In a two-year period, revenue sharing to cities and towns will decrease by approximately 35 percent.”

The steep decline is based on a drop in income tax receipts two years ago because the state distributes money based on income tax collections two years back.

As a result, the situation will continue to get worse in the next two years as income tax money lags two years behind the recovery.

Payson will likely suffer a $500,000-drop in revenue as a result. That exceeds the entire parks and recreation department budget in the current year.

Payson this year struggled to balance the budget by eliminating most capital improvements and street projects and continuing a pay and hiring freeze, with a few exceptions. The town managed to create a roughly $600,000 reserve fund, mostly by borrowing money from its own water department.

In Star Valley, the state-shared income tax revenue represents 23 percent of Star Valley’s operating funds.

“Due to expected fund shortages, we calculate that our funding will drop from $259,000 to $195,000 for the fiscal year June 2010 through July 1, 2011,” said Tim Grier, Star Valley town manager.

This $64,000 decrease in revenue is the equivalent of the building inspector’s salary and benefits.

Unlike other towns, like Payson, Star Valley does not have “any fat to cut” from the budget or town service to reduce spending, Grier said.

“We run a tight ship,” he said.

With few areas to cut, Grier said the town council would have to spend wisely in the next few years.

“I don’t think we have a lot of other options,” he said. The town has already combined the position of town manager and attorney and kept staff levels at a minimum.

“We are fortunate that we have not overspent,” he said because “once we use the money, it is gone.”

Currently, the town has about $3 million in its capital improvements and rainy day funds. Grier worries that if the town spends this money on projects, revenue might not be replaced in the future, especially with photo enforcement revenue down.

The photo enforcement fund generated by cameras to catch speeders on Highway 260 makes up 55 percent of the town’s operating revenue.

The town recently approved a $500,000 paving project and was set to approve several engineering studies. At Tuesday night’s council meeting, the council postponed voting on the engineering studies due to their costs.

“When we pick projects, we have to pick carefully,” Grier said. “The council has to be more careful.”

Grier praised the council for keeping the town in the black for the last four years. To continue this trend, projects like water crossings may be postponed until the recession passes.

“So far, Star Valley is still, knock on wood, in good shape,” he said.

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