Town Budget Takes A Hit

State warns town may lose $500,000 as income tax receipts shrink

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So Payson’s budget gets in this bar fight. And now it’s laying there in the mud and the blood and the beer — kind of groggy and trying to rub the blood out of its eyes, but thinking the worst is over.

Well, guess again. Along comes the economy — blind drunk but laughing kind of scary — and kicks out two front teeth.

That’s a rough summary of the week’s events on the Payson budget front, with word from the Arizona League of Cities and Towns that the income tax revenue will likely drop 13 percent this year and 26 percent next year.

Payson has already absorbed the hit for this year, but the latest estimates from the Joint Legislative Budget Committee will likely mean an additional $500,000 drop in the fiscal year that will start in June.

That $500,000 exceeds the cost of the entire town attorney’s office — or the entire parks and recreation budget, for that matter.

“We’ve got the staff working on contingency plans,” said Payson Mayor Kenny Evans. “Everyone wants to hear that we’ve found a way around this little problem, but as a practical matter, we’ve made some very painful cuts and a lot of people thought, ‘that really hurt, but at least we’re done with it.’ But that’s not where we’re at. There’s still a lot of pain to be extracted out there.”

News on the decline in income tax revenue comes with monthly sales tax figures still showing little signs of an economic recovery — save for a few gleams of hope. The figures come from the town’s September fiscal update based on figures from August Sales tax receipts have dropped 15 percent from last year and 21 percent from the boom year of 2007-08, according to the fiscal year-to-date figures for August. That means a decline from $1.3 million last year to $1.1 million this year.

Construction led the decline, with a 45-percent drop from last year. Manufacturing dropped 23 percent, communications and utilities dropped 13 percent. Retail trade — which accounts for half of all sales tax receipts — dropped 12 percent from last year.

Hotels dropped 14 percent, a disappointment given the slew of summer events sponsored by the town.

However, the figures also offered a few glimmers of encouragement. Arts and entertainment actually rose 8 percent, and spending in restaurants and bars dropped just 5 percent, which suggests locals have been eating out and entertaining themselves enough to make up for the drop in tourism. Or maybe we’re just hitting the bars harder.

Perhaps the single most encouraging sign was an unexpected 5-percent rise in the real estate, rental and leasing category — from $58,000 to $61,000.

Still, the threatened drop in income tax revenue could swamp any small, future gains in sales tax.

Ironically, the decline reflects a drop in income tax receipts two years ago when the economic slide started. Voters in 1972 approved a measure that required the state to collect the income tax and distribute 15 percent of the total to cities and towns. In return, cities and towns gave up the right to impose their own income tax and also gave up certain luxury taxes.

However, the system has a built-in lag, so the state distributes money based on income tax collections from two years ago.

As a result, income tax receipts remained high when sales tax revenue slumped, cushioning the initial blow of the recession. However, the town will pay for that in the next two years, since the income tax money will continue to lag two years after the recovery sets in.

Figures released this week by the state budget committee projected a $155-million reduction in the money going to cities in 2010-11, which is the fiscal year that will start next June.

“This is devastating news for cities and towns across the state,” said League of Arizona Cities and Towns Executive Director Ken Strobeck. “Revenue sharing represents between 30 and 40 percent of a typical city’s general fund, and is spent primarily for police and fire services. This kind of reduction is going to hit local communities very hard.”

The 26-percent reduction means a big cut for Payson, although the income tax revenue here constitutes less than a third of the budget.

That $500,000 represents the combination of the council, town manager and town clerk’s office. It’s about one-fifth of the of the fire department budget, and exceeds the parks budget.

Unfortunately, that reduction will hit an already slimmed-down town budget, still suffering a debilitating decline in sales taxes as the supposedly ended recession drags on and on.

Moreover, town officials are already living in the shadow of a spring vote on “home rule,” a normally routine voter approval of the town’s current spending limit. If voters reject the normal four-year extension of the spending limit, it won’t reduce taxes but it will force the town to all but shut down.

Evans said local revenues have more or less stabilized, but haven’t turned any corners. “You’ll see on the budget charts that the lines are now running parallel — where before they were diverging. Now it’s not getting worse, it’s staying the same, but it’s bad.”

The town so far has managed to cope with the recession without any reductions in police and fire services. In fact, the town council recently approved the sale bonds previously approved by voters to build a new fire station, which will likely cost an extra million dollars a year to staff starting sometime late next year. The town hopes to land federal grants to fund those added firefighter positions, at least for the first few years.

The town water department has the biggest budget, funded entirely by water bills. The water department spends about $6.1 million annually on operations, and this year will likely spend another $10 million in federal stimulus money for preliminary work on the Blue Ridge pipeline.

The police department spends about $4.6 million annually, with the fire department trailing at about $2.9 million.

Other departments lag far behind those three big municipal spenders.

The monthly budget report shows that spending in most departments remains below the austere budget adopted in June.

The most thrifty departments so far include the magistrate court, information technology and public works, which now includes road and parks maintenance.

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