In a cautiously optimistic report released last week, the City of Phoenix administration says it expects to start the new fiscal year beginning July 1 with a $134 million surplus and total spending for the new fiscal year to rise to $1.88 billion from a current $1.78 billion.

As it prepares for the trial budget submission to City Council on March 26, the City Manager’s Office also warned “significant economic uncertainty and volatility exists for 2023, which makes forecasting revenues very challenging.”

The City Manager’s forecast for the coming fiscal year also includes an equally cautious General Fund five-year outlook.

Some of the revenue volatility cited in the 2023-24 forecast relates to a bill that state Republicans lawmakers passed to eliminate municipal rental taxes and another cutting corporate taxes.

A legislative analysis says eliminating the rent tax would cost the city $70.5 million in revenue and that the corporate tax cut would cost Phoenix another $3.5 million. The rent tax elimination bill is currently being reviewed by the Hobbs administration.

Less certain for city spending in the coming fiscal year – as well as for the next five years – is the impact of new contracts with its major worker groups.

Existing agreements expire in June and the City Manager’s forecast says it currently “assumes no changes to existing labor contracts or service levels.”

It also assumes no increase in ongoing operational costs for the new facilities proposed in the $500 million bond issue that Council is likely to put up in November for voter approval.

That bond issue includes a number of new facilities, such as four new fire stations, a police evidence warehouse and a Latino Cultural Center.

But the report also assumes any budget surplus will be “incorporated into the subsequent years’ expenditures, whether in increased one-time and ongoing costs for added programs and services, labor increases, setasides, or other uses.”

“The forecast also assumes any deficit is resolved by reducing expenses

in order to achieve a balanced budget,” it adds.

Both forecasts stress the numerous uncertainties that could challenge Phoenix spending and service levels.

“Areas that could impact the (General Fund) include revenue volatility, continued pension cost increases, higher costs for employee compensation, impacts from State legislative actions, and unfunded mandates,” it says, adding:.

“Additionally, if a recession were to occur in 2023, or legislation is passed that would dramatically reduce revenues, it’s possible that deficits could occur in the future requiring strategic budget balancing actions by the City Council.”

The city’s five-year forecast also notes that while COVID-relief money and higher revenue collections helped the city avoid budget cuts, “the specter of another recession is beginning to take shape.

“Although many economists warn of a downturn in 2023, it is far from certain when a recession will occur, how significant the impact will be, and for what duration.”

For now, the increased spending in the coming year will include higher salaries and benefits for workers, increased vehicle replacement and fire apparatus costs, rising capital equipment prices and a host of inflation-driven expenses.

“Inflation has also dramatically impacted several expenditure categories, including commodities and contractuals such as fuel, compressed natural gas, electricity, motor vehicle parts, plumbing supplies, custodial and security services, machinery and equipment repair, and facility maintenance costs,” the forecast says.

Hailing the surplus as “good news,” the report said it includes $69 million in ongoing savings and $65 million in unexpected revenue brought on partly by higher sales tax revenue.

That additional sales tax revenue results largely from inflation, since higher prices on many goods and services generate a bigger bite of consumer spending for taxing bodies.

Moreover, the surplus also comes from unfilled city positions as Phoenix and other municipalities compete for workers to fill a wide variety of jobs, from police officers and firefighters to administrators and skilled laborers.

Among some sharp increases in spending anticipated for the coming

fiscal year is a $45 million rise in

pension costs.

Of that increase, $40 million represents higher payments for police and firefighter pensions.

The forecast for the next fiscal year also includes $118 million for “pay-as-you-go capital projects.”

One of those projects is a fourth fire station in Ahwatukee on the northwest corner of 19th Street and Chandler Boulevard that Mayor Kate Gallego and Councilman Sal DiCiccio lobbied the City Manager’s office to include in 2023-24.

The fire station will be built on city-owned land that also includes a trailhead parking area, but DiCiccio’s chief of staff, Felicia Mendoza, said it will only cover “the south 300 feet of the property, which will allow Parks to utilize the north portion for the trailhead.”

Expected to open in two years, that station will cut response times for fire and medical emergencies in Ahwatukee’s western communities, DiCiccio said.

And the station will be fully operational when it opens: $3 million in annual funding for personnel and other operating costs will begin to be included next fiscal year so that firefighters entering the academy this year will be fully trained, Gallego said.

The pay-as-you-go projects also include new information technology and a new Municipal Court case management system, the City Manager’s report says.

The report also says the budget will increase its contingency fund from $68 million to $76 million to “improve the city’s ability to withstand future economic declines.”

It notes that the city is steadily increasing that emergency reserve so that 5% of spending in every annual budget from 2026-27 onward will be set aside for contingencies.

The spending plan for the coming fiscal year has a long way to go before becoming reality.

Once the Trial Budget is released March 26, Council will hold hearings

and citizens will be asked for their input as well.