Suzanne Klapp: Budget Deadline Looms Large

By Suzanne Klapp —

The Scottsdale City Council is running out of time to address the severe economic impact we are witnessing now in our city revenues.  Each day we do not recognize and act on the dramatic drop in sales tax revenues, the budget hole for the city’s next fiscal year just gets deeper.

I am increasingly uncomfortable and alarmed with the lack of movement from city leadership on appropriately projecting significantly reduced revenues and developing a realistic budget that recognizes the unique and devastating effect the Coronavirus pandemic has had on the residents and businesses in Scottsdale and on our city’s financial health. Our city has been hit hard by the pandemic

This week the City Council held its second discussion on a 2020-2021 fiscal year budget that begins on July 1st; revenues are now projected by city management to decline about $25 million or around 7% from the previously projected $338 million revenue figure in the General Fund.  Or, compared to this fiscal year’s adopted budget, revenues are projected to be down only $13 million or 4% less.  The Council must adopt a tentative fiscal year budget in about two weeks.   Final budget adoption will be on June 16th.

This most recent budget plan from city management projects what is referred to as a V-shaped recovery, where as soon as the city reopens, business will bounce back.  As presented to the Council, the budget optimistically reflects that the present economic woes and rapidly declining revenues will immediately begin to improve in the first half of the next fiscal year – starting July 1st. After that, it’s back to “normal” or business as usual.

The notion that Scottsdale will regain its financial footing in a short period of time is absurd, and I hope my Council colleagues will see as I do, that we must prepare for a long recovery over at least a year or more. The chances of even a U-shaped recovery, where revenues remain flat for a while and then slowly begin to recover, are quickly disappearing.  According to local economist Elliott Pollack, the recovery will be more like  “a (Nike) Swoosh with a lot of bumps and dips along the way.”

Some public health experts project that the Coronavirus will return, possibly in the fall of 2020, which would then extend the bottom of the curve and possibly another shutdown of the city. All these scenarios appear to project that a quick recovery is likely not happening in Scottsdale.

Our budget should reflect that the city will use up its $55 million unreserved fund balance by early 2021, unless we begin more serious budget cutting now.

Too much latitude, too much discretion, is clearly unadvisable.

The City’s March sales tax receipts are now down 26% compared to March of last year.  April’s decline will likely be double that of March, according to City Treasurer Jeff Nichols.  And May sales tax receipts will very likely be similar to April, even with businesses slowly reopening.  About 50% of city budget revenues in the General Fund are generated by sales taxes.

Slipping consumer confidence, health concerns and Scottsdale’s dependence on tourism and related activities will significantly slow the city’s ability to bounce back after this recession.   According to the Conference Board’s Consumer Confidence Index nationwide, consumer assessment of business conditions dropped a record 90 points in April.  These consumers do not believe they will see their incomes rise.   The overall consumer confidence index dropped from 118.8 in March to 86.9 – a rapid 27% decline.

Some steps have been taken in the last two weeks to cut our city budget expenses and stem the flow of red ink. Planned salary increases, representing $7.5 million, have been deferred, but have not been eliminated as I have strongly recommended.  By delaying some spending and vehicle replacements, holding full- and part-time positions vacant, and some other cost-cutting mechanisms, total reduction in the general fund operating uses is now stated at $18.9 million – a far cry from where this number should be.

Yet, the Council’s report on budget balancing in our operations does not give a clear picture.  A $10 million contingency fund has been set up by city management to contain anticipated spending: one-half year of salary merit increases, ($3.8 million), one-half year of salary market adjustments ($2 million), the vacation trade program (.7 million), and various other costs.   This fund is still part of the budget expenditures, but is inappropriately separated into a contingency category in order to be utilized later at management’s discretion.  About $7 million of the $10 million consists of items moved from the budget’s operating uses.  A normal operating contingency fund would be about $3 million.

It is imperative that the City Council has clarity now on revenue figures and the actual spending plan, as I requested in the last meeting and which my fellow Council members affirmed by a 7-0 vote. My analysis of the budget is that expenditures have not actually been cut as much as was presented in this weeks’ meeting.  Shifting planned expenditures from one category to another creates too much discretion and a true lack of transparency.

It is far too optimistic to project a $25 million drop in revenues.  The revenue decline will be at least double that amount or $50 million, and realistically, the revenue drop could be as much as $80 million.  I hope my council colleagues agree.    If the drop is larger than our revenue forecast, for each million dollars we do not cut now, we will likely sacrifice 10 people later.  Personnel costs make up 74% of the general fund expenditures.

These are hard decisions, but they must be made.  Salary increases must be eliminated entirely, not held in a contingency account. We cannot contemplate increases at the same time that we are eliminating people. Some programs and services must be cut.  Hours at some city facilities must be reduced.  Selected capital projects must be deferred or closed to potentially free up millions of dollars in operating costs from the General Fund.  Some jobs should be shifted to work-at-home or in remote locations to reduce facility costs.  Some city properties (not in the Preserve) should be sold.   There’s many more ways to find needed dollars.

I made a recommendation two weeks ago that the City Manager and executive staff should immediately discuss prioritizing services now to determine which are most and least important for serving our residents and businesses.  That has not happened.  Instead, there is a plan to hire an outside consultant to do this work.

Such a process will take months and will not help us to make decisions by June.  I have faith in our own city people to discuss and set the proper programs and services priorities.  Department heads know their operations intimately and the serious nature of the budget dilemma. We have talented people in our own organization who have the skills to lead productive discussions throughout the organization.

We have little time to face the reality, with each passing day, that our city’s economy is in a deep dive.  With each passing day we will be digging the city out of a deeper hole and watching our city change dramatically.  We have to answer tough questions about how we can do business differently, more efficiently, in a more cost effective way, while serving the residents and businesses in Scottsdale.

It is my job right now to navigate a perilous economy, to make realistic budget decisions, to help build consumer confidence to reignite the economy and to help get people back to work.

Suzanne Klapp serves on the Scottsdale City Council and is a candidate for Mayor.