Prescott 2050

SUSTAINABLE FUNDING REPORT

CITY OF PRESCOTT 2050
SUSTAINABLE FUNDING COMMITTEE

Members:
Comer Wadzeck, Chairman
Ken Mabarak, Co-Chairman

Albert Bradshaw
Steve Conrad
Jason Gisi
Jeff Hall
Gary Hassen
Ed Nicholson
Victor Pereboom
Steve Rutherford

TABLE OF CONTENTS

Sections - Pages

Introduction

A.1 Vision 2
A.2 Mission 2
A.3 Assumptive Information 3

City Finances

B.1 General Fund 4
B.2 General Fund Recommendations 5
B.3 Enterprise Funds 7
B.4 Enterprise Funds Recommendations 7
B.4 Capital Improvement Projects 8
B.5 Capital Improvement Projects Recommendations 9

Conclusion & Summary

C.1 General Recommendations 11
Regional Resource Cooperation
Air Park / Industrial Park
Sports / Entertainment Facilities
Annexation
A Better Informed Public
C.2 Summary 14

VISION

Identify fair, predictable, sustainable revenue sources for the purpose of maintaining the quality of life and maintaining controllable growth in the City of Prescott.

MISSION

Anticipating the capital needs of a city such as Prescott is, at best, an inexact mission.  Forecasting projected population growth rates, consumption needs, federal and state mandates, along with regional issues will tend to obscure even the best of projections.  As a result, virtually any recommendations deemed at this date will require review and modification over time.  The mission of this subcommittee has been to define current sources of revenue, project infrastructure capital needs and explore alternative sources of revenue or cost abatement for both operating costs and capital improvements.  It should be clearly noted that this committee had no authority or desire to judge the actual expenses or efficiencies or adequacies of operations in the City’s budget.

Long-term economic cycles of either growth or regression will clearly have significant impact on municipal budgets.  At the same time City operations will tend to be linear in nature.  In general, the city of Prescott’s budget is composed of two segments:  the operating expenses and the capital improvement expenses.  Our attempt here is to outline current revenue sources and to provide suggestions for future resources of cost recovery.

It should be said at the outset that the cooperation and information provided by the City staff as well as those of neighboring cities has helped make this document possible.  We were fortunate to have such talented and high caliber professionals working with us in this collaborative effort.
ASSUMPTIVE INFORMATION

The conclusions derived by the committee, are predicated upon the following basic assumptions:

• The geographic boundary of the City of Prescott will continue to expand.
• Annual population increases will continue at a level in excess of the nation as a whole.
• The City will continue to fund its Operating Budget on a cash basis (incurring no debt).
• Capital Improvements will likely be funded via traditional methods such as cash, bonding and Community Facility Districts, although the City will likely be compelled to rely on newer and more unconventional methods such as Enterprise Fund Districts and Private Public Partnerships.
• All traditional revenue sources such as Privilege Tax, Property Tax, License and Permit Fees, Water and Sewer User Fees, as well as reliance upon State Revenue Sharing, will continue to fund the Operating Budget.  Impact fees will continue to increase to support the cost of new construction.
• Public demand for increased quality services coupled with its reluctance to endure new or increased taxes will exert continued pressure on the City to seek new revenue sources for both Operating and Capital Improvement budgets well into the future.
• Federal and State revenue sharing and reimbursements to local regions will likely dwindle in the near term and perhaps even in the long term.
• Our City’s streets, sewers, and water delivery system are reaching their points of obsolescence.
• This report assumes a continuous and reliable source of water to the region, without which all contained herein is for naught.

GENERAL FUND
The General Fund Budget of the City of Prescott is funded by various tax sources.  The levels of contributions from the major tax sources are as follows:

53% Privilege Taxes (commonly referred to as Sales Tax)
25% Revenue Sharing from State and Federal governments
5.5% Intergovernmental Funds
5% License, Fines & Permits
4.5% Franchise Tax – Comprised of payments for use of City easements for utilities such as Cable, Telephone Gas and Electric
5.2% Miscellaneous sources
1.8 % Property Taxes

The day-to-day expenses of the City are funded through traditional sources with which most of us are very familiar.  The revenue derived in this portion of the budget is principally from two categories: privilege tax (sales tax) and inter-government items (revenue sharing and reimbursements).  These two items make up approximately 75% of the current Prescott General Fund Budget.

It should be noted that during periods such as the one we are currently experiencing our two major categories of revenue are severely impacted.  Prescott will continue to experience the negative effects of declining Privilege Tax revenues and State/Federal Revenue Sharing.  We are effectively bystanders to this process.  It is this area of the budget that officials refer to when we hear them talk of a “budget crunch” since we are virtually helpless to do anything about this.

Since the general public is significantly more familiar with the following taxes, we have included here some inherent characteristics of these sources of revenue:

• Privilege Tax
• Comprises the majority of the income for the general fund budget.
• Subject to economic fluctuations.
• Highly dependent on automobile and construction industries.
• Visitors or non-residents pay a significant portion.
• Sales tax is not legislatively restricted.
• City charter requires voter approval.

• Property Tax
• Fair to all residents; however, it makes up a very small portion of the City of Prescott’s budget.
• Increases in property taxes are heavily restricted by existing legislative and prior referendum action.
• In the past, the City has not increased Property Tax to the levels authorized by State legislation.

GENERAL FUND RECOMMENDATIONS

The committee would recommend and encourage the City of Prescott to bolster the revenue sources in the following manner:

• Maintain the current 1% sales tax currently being directed to the General Fund.
• Support continuation of the other 1% sales tax for Streets, Roads, and Open Space.  Failure to maintain this sales tax, directed to capital improvements and open space, will ultimately require expenditures from the general fund, which cannot be supported from the current 1% sales tax.
• The committee believes that the voter passage of a double-digit sales tax would be difficult to obtain.  An uncompetitive sales tax rate may drive consumers to other markets, including the Internet.  Additional increases from the State, County, and local capital improvement projects could drive the sales into this double-digit range.
• Future construction projects or purchases of assets should be supported by funds derived from outside the General Fund.  In most cases, Prescott construction projects are funded from sources outside the General Fund.  As in the case of the Open Space initiative, the purchase of the property is funded from a revenue source not attached to the General Fund, but the ongoing maintenance, insurance, and other annual expenses on these assets are paid for out of the General Fund.  It is strongly suggested that these ongoing expenses be minimized.  In the future, we suggest that new projects be engineered and designed in such a manner that a minimum of continuing maintenance is required.  Additionally, future acquisitions should seek its source of maintenance from the same funding source as was used to acquire the asset initially.
• As discussed above, an example of construction projects that can fund themselves for maintenance are Community Facility Districts.  The prime example in Prescott is the Hassayampa Country Club.  A Community Facilities District requires the landowners, either residential or commercial, to fund not only the cost of construction, but also the cost of maintenance over the life of the project.  The aggressive use of Community Facilities Districts can greatly reduce not only the origination cost of new projects, but also the long-term maintenance on the asset, providing a positive impact to the General Fund.
• It is the general opinion of this committee that General Fund budgets should be prepared on a conservative basis.  Revenues should never be projected at economic highs or economic lows, but at averages over the past five years.  Matching expenditures to this conservative revenue projection will ensure that the City does not have explosive growth of expenses during a period of strong growth.  In those periods of strong economic activity, proper budgeting will provide financial reserves to support the City operation during economic downturns.
• Property tax makes up a small portion of the City budget, but the City has had the opportunity to raise their portion of the property tax throughout the years.  For whatever reason, the City has chosen not to do so.  It is the recommendation of this committee that the City increase the property tax per the guidelines to support the City budget.  The advantage to the City, even though it represents a minimal amount, is that property tax is fair to all and does not have the wild fluctuations that the City experiences with its sales tax.
ENTERPRISE FUNDS

The other portion of the operating funds is comprised of what is called enterprise funds.  The enterprise funds are revenue items that in large part are reimbursements or fees charged to the public for various services provided by the City.  Examples of this type of revenue would be Antelope Hills Golf Course, water, sewer, parking garage, and airport.  These categories are largely “pay as you use” items.  In general, the revenue derived is offset by the costs incurred. 

ENTERPRISE FUND RECOMMENDATIONS

• All enterprise funds should be increased annually and, at a minimum, kept current with regional inflation rates.  This certainly would include Antelope Hills Golf Course player fees and Parking Garage fees.

• Water and Sewer Users fees should be reviewed to determine if rates can be increased annually at some number in excess of inflation and certainly commensurate with actual and anticipated costs.  As water is universally viewed as a precious commodity, at least as defined by the State of Arizona, an increase in fees can be justified as a conservation method and an investment in our future.

CAPITAL IMPROVEMENT PROJECTS

Prescott’s Capital Improvement Project is an orderly plan for meeting the community’s needs for physical infrastructure facilities such as streets, parks, and public buildings.  It is a comprehensive schedule of capital improvements needed within the City and establishes a program to accomplish those needs within the City’s ability to pay.  Capital improvements are those items that could be considered assets of the community.  As the city grows, it has need for new improvements or replacement of its assets.  Water/sewer systems, street repair and maintenance, municipal buildings, airport additions, fire and police stations, libraries, parks, etc. comprise the bulk of our capital improvements.

When sufficient cash is not available to fund necessary capital improvements, these improvements are either deferred or funded through the use of long-term bonds.  The repayment of these bonds can come from various sources:  Highway User Revenue Fund (HURF) reimbursements from the state and special sales taxes such as streets and open space tax are just two examples of repayment methods.  An example of capital improvements, which have been deferred in recent times, is clearly seen in our roads and streets.

As the city grows, it has increased need and demand for additional streets, police and fire stations, parks, and services demanded by the public.  The argument as to when these capital expenditures are put in place is typically a contentious issue. 

As an example, the City is now debating the proposition of an extension to the current 1% Street and Open Space sales tax beyond its 2015 sunset, in order to pay for what is now estimated to be a $151 million expenditure through 2016 for open space acquisition and reconstruction of existing streets and sidewalks.  As this report is being written, ironically, Council discussions and editorials appearing in the Daily Courier have shown us how complicated and varied opinions are as to paying for capital improvements.  Sadly, the result of these varying opinions can be the continuing delay of improvements we all understand as being necessary.

Another method of funding infrastructure costs for new development, though seldom used in our community, is a Community Facility District.  One of the few examples currently implemented is in the Hassayampa Village.  The basic concept in a Community Facility District is that the intended user of the infrastructure actually pays its cost. 

CAPITAL IMPROVEMENT PROJECT RECOMMENDATIONS

• Sustained Funding. The recommendation of this committee is to implement sustained funding of current taxes dedicated to capital improvements.  A clear example of this is the Streets and Open Space tax wherein we recommend an extension for, at a minimum, an additional 15 years.  This extension gives the City the capacity to bond (or in effect borrow) to assure ourselves that all street repair/replacement and new construction be achieved in a timely manner.  Without sufficient bonding capacity, i.e. more time to pay, then current projected revenue through 2015 will be insufficient to meet our needs and the repair and maintenance of our streets will continue to be deferred into the future.

• Community Facility Districts.  CFD’s are a viable option for the large-scale annexations already completed and those in progress in north Prescott.  At the present time, as much as 6,000 acres of land could be added to the municipality in the airport area alone.  This will create the need for hundreds of millions of dollars of infrastructure over the next twenty years.  This need will be in addition to any future Big Chino Pipeline funding obligations.  The use of CFD’s in the airport area would result in a scenario whereby “growth would pay for growth”.  The obligation to pay- off the bonds used to finance these districts would be borne solely by those who benefit directly from the improvements.  The ancillary benefit is the opportunity for “off balance sheet” financing for the City of Prescott.  It is acknowledged that there could be a need for an underlying guarantee of the City of Prescott depending on the exact structure of the CFD.  This would be determined on a case by case basis as the City of Prescott City Council would serve as the District Board whether there is a need for a guarantee from City of Prescott or not.  Overall, CFD’s could play a vital role in creating the infrastructure needed in order to attract sales tax producing businesses to the area.  In addition, the airport area should include a significant number of employment opportunities that over time will allow the area to broaden and diversify its vital economic base.

• Private/Public Partnerships.  PPP’s represent another potential opportunity for the City of Prescott to creatively finance unique and significant infrastructure needs of the future.  City Council and staff are presently working through a crash course on these possibilities due to the interest expressed by private parties hoping to collaborate with City of Prescott and Town of Prescott Valley in the construction and operation of the Big Chino Pipeline.  Globally, PPP’s have been used for decades in order to finance large-scale infrastructure developments from toll roads to substantial water and sewer improvements.  As Federal, State and Local revenues continue to falter, or at a minimum be unreliable, PPP’s seem to be an avenue by which municipalities and the State can keep up with new infrastructure demands.  PPP’s clearly represent an additional opportunity by which capital improvements will be constructed in the future.  It should be noted that as our society continues to seek to de-leverage or tolerate less direct debt, that PPP’s are not free.  Overall, governmental debt loads will be monitored even more closely by those potential private sector partners prior to their commitment.  Reasonable debt loads on well-underwritten projects will be expected but debt is debt whether on or ‘off’ the balance sheet of the City and too much debt will severely impair the opportunity to enter into new PPP’s.

• Maximization of Property Tax Levies.  For some unapparent reason the city has elected not to assess property tax at the maximum limitation provided by state statute.  While the public may feel the majority of the Property Tax they pay goes to the City, in fact, the City only receives 3.4% of its Operating Budget revenue from Property Taxes.  It is our considered recommendation that all property tax levies be maximized in each budget year.

GENERAL RECOMMENDATIONS

• Regional Resource Cooperation. This is not a new concept.  We have shared the resources of our regional neighbors in the past.  Certainly the police/sheriff departments share resources, some children living in one city actually go to another city’s school since school boundaries surprisingly do not follow municipal boundaries.  Clearly, the proposed Big Chino water pipeline will be a resource shared by two cities and yet located in an unincorporated area of the county.  A growing concept developing today, perhaps due to the economic dilemma we are encountering, is one that considers the residents of our region and their spending power as resources as well as clearly defined physical resources such as Gateway Mall, Tim’s Center, and Prescott Municipal Airport.  Much of the spending generated in one city is due to patronage by citizens of one of our other cities.
It was our regions population that met the requirements to become a Metropolitan Statistical Area (MSA) a few years ago.  No one city in our area was of sufficient population to do so on its own standing.  Likewise, some resources, which lie in one city, clearly benefit the region as a whole, such as the airport, but would be impractical to duplicate in all cities.  The Big Chino Water Ranch is a clear example of Regional Resource Cooperation.
As we work our way through the next few generations and approach 2050, perhaps it is time our city leaders and those of neighboring cities, commence working together to reduce expensive service and amenity redundancy and devise ways to more economically provide the region’s residents with the services they realistically require.
We need to take the inherent principals developed in sharing the Big Chino Ranch asset and apply them to other regional assets as well.

• Air Park / Industrial Park. As a potential hub for the entire region, the Airpark and the industrial properties surrounding it can be utilized as an important employment base for Prescott, Prescott Valley, and Chino Valley to varying extents.  This asset may actually prove to be a regional asset and we should look further into cooperating with our neighboring cities to use it to attract industries, which will provide new employment opportunities for those living in the region.  In addition, hundreds of acres of land fronting State Highway 89-A will be opened up to the possibility of retail development that could serve to shore up the City of Prescott’s retail sales tax base.  Presently, sales tax revenues are leaking east due to the progressive actions of the Town of Prescott Valley.

• Sports / Entertainment Facilities. Prescott needs to expand its thinking to areas beyond the Courthouse Square to create tourism and commerce.  As we extend the city limits to the north, we need to look here to capitalize on existing amenities and develop new attractions for commerce.  The area surrounding Heritage Park and Pioneer Park, coupled with any new annexations in this area, should be viewed as a potential venue for the attraction of new and expanded activities.

• Annexation.
• Large Parcel Annexation. As the City population moves North and East, those large tracts of County land should be incorporated within the City boundary map.
• Urban Service Boundary. This concept encompass those ‘pockets’ of land which are in the County but receive water and/or sewer services from the City of Prescott.  Typically, these are subdivisions, such as Wildwood, Vista Del Cerro, Grandview, and other subdivisions along Williamson Valley and Iron Springs Roads.  The population of such areas could be as high as 2000 people.  The calculation of Federal and State revenue sharing does not include the residents of these areas, yet for the most part, they appear to be within the service area of the City as well as users of our Streets, Parks, etc.  This loss of revenue to the City of Prescott could realistically return to our community the $5 to 10 million that currently is retained by the State of Arizona and the Federal government.

• A Better Informed Public. Faced with vital issues that have the potential to define the direction of our future, Elected and City officials need to make a more thorough effort to better educate the public not only as to the limitations on our revenue source for an item but also details of the specific issue.  The general populace of Prescott tends to be involved, educated, and often passionate about our community.  Simply telling them “We need this”, will often prompt more questions than compliance.  Public forums, balanced newspaper presentations, and public handout packets can all better educate the public as to the merits and consequences for significant public issues.

SUMMATION
A common reaction among the committee members was just how surprised we all were upon realizing the limitations on municipal funding.  Federal and State legislation, citizen referendums, bonding limitations along with citizen resistance all work to make the process rather complex and leaves municipalities with few options to fund its future.

We are all faced with personal dilemmas in our lives.  Residents of Prescott currently are faced with a community quandary as well.  Our quandary finds us in a tug of war between the questions:  What is it I want in my community?  What do I need in my Community?  What do I want my children to have in this community when I am gone?  And just how do I pay for all that I desire?

As we have seen on countless issues in the past and as we will witness in reviewing the various 2050 Committee reports, our desires for Prescott are incredibly diverse.  While we all desire good things for Prescott, we commonly part ways when we discuss the desires, for which we are willing to pay higher taxes in order to attain.  Each of us has a different priority.

The daunting task for the immediate future is to decide between paying an appropriate level of taxation to maintain the quality of life that attracted us to Prescott, and keeps us here; or continue to push for minimizing taxation at the peril of watching the quality of life diminish for us, as well as for our children’s generation as well.

Other 2050 Committees have developed numerous ideas to improve the lifestyle in Prescott.  The only way to achieve these projects is to find new revenue to fund these new ideas. 

The Prescott we all want is supported by our ability to identify fair, sustainable revenue sources for the purpose of maintaining the quality of life and maintaining stable economic vitality.  We must focus on the many supporters, large and small, of Prescott’s cultural heritage as well as its financial lifeblood.  Above all, Prescott must exercise diligence to avoid liabilities that have the potential to require the curtailment of city services, the excessive raising of taxes and the delay or abandonment of our long-term objectives.

Prescott must become opportunistic in the gathering and use of its resources.  An opportunistic Prescott is one that becomes skilled at achieving improvements through non-conventional means and innovative in its thinking as well as its actions.  A sustainable Prescott, if it is to support the many other objectives identified by the Prescott 2050 Committees, must become a careful and opportunistic master of its finances.