Final 5 Year Forecast and Status Research Report 23-28.pdf

City of Phoenix — City Council Policy Session (2023-02-21)

Extracted text (via pymupdf) 43739 characters

RESEARCH REPORT
BUDGET AND RESEARCH DEPARTMENT
B.R. REPORT NUMBER
2023-05
DATE ISSUED
February 16, 2023
TO:
JEFF BARTON
CITY MANAGER
FROM:
AMBER WILLIAMSON
BUDGET AND RESEARCH DIRECTOR
SUBJECT

FIVE-YEAR FORECAST AND FY 2023-24 PRELIMINARY GENERAL FUND BUDGET STATUS
BACKGROUND
Development and presentation of the five-year forecast is an important step in the City’s budget
process. Evaluating projected available resources and identifying potential ongoing budget
surpluses or funding gaps will allow management and City Council to develop strategic plans to
ensure the continuation of operations and optimize services to the community.
The Five-Year Forecast estimates future revenues and expenditures of the General Fund for the
current fiscal year through fiscal year 2027-28. The purpose of this forecast is to identify key trends
in revenues and expenditures and to provide information about the financial landscape anticipated
over the next few years. The information contained in this forecast is based on data available
through January 2023.
The General Fund (GF) five-year forecast (Attachment B) is provided to the City Council
and the community for consideration and provides City policy makers:
• A strategic financial management best practice
• A framework for strategic decision-making
• The opportunity to make policy changes to maximize City resources and service delivery
• A roadmap to continued fiscal health and award-winning budgetary and financial reporting
The forecast is not an official policy or legal budget document and does not enact any budgetary
allocations. The forecast is also not intended to set or precisely predict future revenues or
expenditures. Rather, the forecast presents current estimates based on several economic and
financial assumptions of the future direction and ranges of growth rates for both resources and
expenditures. The economic, revenue, and expenditures assumptions are provided in Attachment
C.
The forecast is built on several assumptions outlined in Attachment C regarding:
• The national, state, and local economy
• Population and job growth
ATTACHMENT A

- 2 -

• Revenue growth
• Impacts of anticipated increasing pension liabilities
• Estimated additional costs anticipated for the Class and Comp study
• Cost management practices
• Future year expenses

All of these factors are subject to change and are detailed further in this report.
Projecting future available resources and expenses over multiple years is complex and involves
several assumptions concerning how revenue and expenditures will grow over time. In order to
model potential future budgetary scenarios under varying economic conditions, a range is provided
for resources and expenditures. The differences between the upper and lower ends of the ranges
increase in the later years of the forecast reflecting additional economic uncertainty. The top of each
range represents the “optimistic” forecast, while the bottom of the range represents the “pessimistic”
forecast. All of the ranges are based upon the assumptions described in this report.

It is important to note, if any of these assumptions as described were to change or modeled
differently, the ranges of amounts presented in the forecast would need to be revised. Unexpected
economic shocks, recessions, legislation, unfunded mandates or other risks to the forecast can
also adversely impact projections.

Additionally, even slight variances in the revenue and expenditure growth rates in the initial years
of the forecast result in substantial changes to the later years due to the compounding effect of the
changes. For example, a revenue growth variance of only 1% in FY 2023-24 can result in a $16.6
million change to the ending balance, which would impact the ending fund balances in the
subsequent forecast years. Long term forecasts become less reliable the further they are from
development because of the many underlying assumptions subject to frequent fluctuations.

Projections are formulated in the first six months of the fiscal year and are based on current
estimates of where staff believes resources and expenditures will be for the current fiscal year and
the subsequent five years. In order to create the most reliable revenue and expenditure projections,
staff relies on several economic sources, months of actual collections and extensive technical
reviews before recommending estimates to City management and ultimately the City Council for
final consideration.

It has been more than three years since COVID-19 began in December 2019. Although the impact of
COVID-19 has been mitigated, other issues emerged, including geopolitical conflicts, high inflation,
supply-chain issues, tighter monetary policy, volatile markets, labor shortages and anticipated
economic slowdown or mild recession in 2023. The baseline forecast for the remainder of FY 2022-23
and looking ahead to FY 2023-24 is projected to expand at a slower pace and with high uncertainty.
The FY 2023-24 ending General Fund balance is estimated to be $134 million (Attachment B), with
approximately $65 million from one-time resources and $69 million representing ongoing resources.
The one-time amount is primarily due to excess vacancy savings accumulated over the past two
fiscal years and includes the additional $39M in resources carried forward from the FY 2021-22
ending balance presented to the City Council on September 27, 2022. Staff will bring
recommendations on how best to allocate the surplus to the City Council on March 28th in the
proposed FY 2023-24 Trial Budget. To better prepare for future challenges, this report also includes
stress testing for moderate and severe recessions, which is an essential fiscal tool to evaluate how
revenues might respond to different levels of economic crisis (Attachment D, E and F).

- 3 -

OTHER INFORMATION
It is important to note the preliminary FY 2023-24 budget and forecast is based on existing state-
shared revenue models and statutory obligations. Any changes to state-shared revenue formulas,
or other revenue sources proposed in the Governor’s budget or in legislative bills that would
impact the GF budget, are not reflected and would need to be addressed if adopted by the State.

General Fund FY 2023-24 Preliminary Budget Status

FY 2023-24 Resources- The chart below shows the preliminary resources projection:

GF Resource Category
2023-24
Preliminary
Estimate
(in millions)
2023-24
Preliminary
Projected Annual
Growth Rate %
Local Sales & Excise Taxes
$699
2.9%
State-Shared Revenue 1
$771
22.4%
Primary Property Tax 2
$207
3.5%
User Fees and Other
$154
1.4%
Beginning Balance 3
$191
N/A
Transfers/Recoveries 3
($7)
N/A
Total GF Resources
$ 2,015
10.1%

1 Does not reflect any impact to State-Shared Revenue resulting from the FY
2023-24 State budget, nor legislative changes that have recently been proposed or
discussed during the current legislative session.
2 Assumes the continuation of City Council adopted policy to maximize the primary
levy in order to preserve GF services. Any deviation from this policy would require an
ongoing reduction to GF programs.
3 Estimates for beginning balance and transfers/recoveries are not derived from
annual growth rate projections or broader economic factors.

Revenue Forecasting Model - In the fall of 2014, Budget and Research consulted with the University of
Arizona’s Eller College of Management, Economic and Business Research Center (EBRC) to enhance
the City’s sales tax revenue forecasting process. Dr. George Hammond, EBRC Director, and Dr.
Alberta Charney, Senior Research Economist, spent several months working with City staff to develop
an enhanced econometric sales tax forecasting model for all categories of city and state sales tax. In
the summer of 2017, staff worked with EBRC to update the tax forecasting model. In March 2021, the
EBRC revised the City’s model again by including online sales tax. The City began collecting sales tax
from online marketplace retailers effective October 2019 just prior to the pandemic, which helped to
offset losses experienced in the leisure and hospitality sales tax categories. The EBRC leads the State
of Arizona Forecasting Project, which provides in-depth economic forecast analysis and databases on
a subscription basis to businesses, organizations, and government via membership. The additional
consulting with Dr. Hammond has provided the City with solid, independent economic and statistical
expertise used to develop a statistically valid forecasting model specifically for the City of Phoenix. The
projected growth rates in each category of sales tax for the FY 2023-24 estimate and the out years of
the forecast are based on projections developed with the enhanced econometric forecasting model.

- 4 -

2023-24 Expenditures - The preliminary expenditure estimates may change as cost estimates are further
refined in the coming weeks. At this time, the preliminary FY 2023-24 General Fund expenditures are
projected to be $1.881 billion, representing an increase of $102 million over the FY 2022-23 budget. The
increase accounts primarily for higher costs for pension and vehicle replacements, increases in capital
equipment and pay-as-you-go projects, and higher contingency amounts.

Pension Costs - Expected changes in COPERS and PSPRS pension costs are as follows:

• COPERS: GF pension costs in FY 2023-24 for civilian employees are expected to grow by
approximately $5 million compared to the current year budget. The overall trend in
COPERS pension cost has been driven by recent actuarial changes, plan earnings,
payroll growth and pension reform. As the five-year forecast shows, COPERS pension
costs are estimated to increase $9 million from the FY 2022-23 budget through FY 2027-
28 (Attachment B and G).

• PSPRS: GF pension costs in FY 2023-24 for sworn Police and Fire are expected to increase
by approximately $40 million compared to the current year budget. The primary factors
contributing to the growth over the current year budget are recent actuarial changes, plan
earnings, and changes to the payroll base. As the five-year forecast shows, public safety
pension costs are estimated to increase $90M from the FY 2022-23 budget through FY 2027-
28 (Attachment B and G), which adds significant pressure to the GF budget going forward
and limits the City’s ability to either expand program and services to residents or increase
employee compensation.
Contingency – The contingency fund is assumed to increase from $68 million to $76 million in FY
2023-24 to reflect 4.5% of operating expenditures. It is increased by 0.25% in FY 2024-25 and
FY 2025-26 to 4.75% and 0.25% in FY 2026-27 to achieve 5.0%. In March 2010, the City
Council agreed to gradually increase the contingency with a goal of achieving 5.0% of GF
operating expenses. Achieving this goal will improve the City’s ability to withstand potential future
economic declines.

Detailed preliminary estimates with multiple year-to-year comparisons are included in the Zero-Based
Budget Inventory of Programs document, which is available online at phoenix.gov/budget. Revenue
and expense estimates continue to be developed, and more definitive estimates will be presented
along with the City Manager’s Trial Budget on March 28th.
The GF preliminary FY 2023-24 budget status and Five-Year Forecast are provided for
information and discussion.

ATTACHMENTS

Attachment B- Five-Year General Fund Forecast
Attachment C- Forecast Assumptions
Attachment D- Background, Methodology and Assumptions for Stress Testing
Attachment E- Stress Testing for Moderate Recession Scenario
Attachment F- Stress Testing for Severe Recession Scenario
Attachment G- Pension Cost Increases

- 5 -

ATTACHMENT B
5-Year General Fund Forecast ($ Millions)
2022-23
Adopted
Budget
2023-24
Preliminary
Budget Estimate
2024-25
Forecast
For Planning Purposes Only
2025-26
2026-27
Forecast
Forecast
2027-28
Forecast
Resources
Local Taxes
$632
$699
$727 - $737
$757 - $779
$788 - $824
$818 - $869
State Shared Revenues
621
771
734 - 745
718 - 741
744 - 780
774 - 825
Primary Property Tax
199
207
214 - 217
221 - 227
228 - 238
235 - 250
User Fees and Other
135
154
155 - 158
157 - 162
159 - 167
161 - 171
Other (Carryover Balance, Transfers, Recoveries)
135
116
35
26
27
25
Unused Contingency from Prior Year
57
68
76
86
89 - 88
96 - 95
Total Resources
$1,779
$2,015
$1,941 - $1,968
$1,965 - $2,021
$2,035 - $2,124
$2,109 - $2,235
Expenditures
Operating Expenditures
$1,270
$1,241
$1,350 - $1,343
$1,392 - $1,383
$1,417 - $1,407
$1,473 - $1,461
Civilian Pension
107
112
106
107
114
116
Sworn Public Safety Pension
261
301
324
336
344
351
Contingency
68
76
86
89 - 88
96 - 95
99
Pay-As-You-Go Capital (Includes Technology Plan)
48
118
47
47
47
46
Minimum Vehicles
25
33
36
36
45
45
Total Expenditures
$1,779
$1,881
$1,949 - $1,942
$2,007 - $1,997
$2,063 - $2,052
$2,130 - $2,118
PROJECTED (DEFICIT)/SURPLUS:
$ -
$134
$(8) - $26
$(42) - $24
$(28) - $72
$(21) - $117
Key Resource Forecast Assumptions:
* The forecast assumes modest revenue growth with no recession from 2023-24 to 2027-28, no fee increases or decreases and no new revenue sources.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from 4 in Tax Year (TY) 2021 to 2 brackets in TY 2022. Starting from
TY 2023, the individual income tax has been reduced to 2.5%.

* Relative population share used in calculating state shared revenues in 2023-24 was based on the 2021 Census Bureau Population Estimate. It was projected to remain flat throughout the forecast period.
The actual share will change annually based on Census Bureau Population Estimates. In addition, Laws 2021, Chapter 412 (Tax Omnibus) increased the Urban Revenue Sharing distribution from 15% to
18% starting in 2023-24.

Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.5% in 2023-24, 4.75% in 2024-25 and 2025-26, and 5% for both 2026-27 and 2027-28 of the total General Fund operating expenditures.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2023-24 employee costs are based on projections under the current Council-adopted pay plan ordinance and employee contracts. No assumptions have been made concerning future labor contract
negotiations. Estimated costs of the Class and Comp study have been included in the forecast. Pension costs are based on required and projected contribution rates provided by the respective pension
system actuaries.
* Non-personnel related expenditures for 2023-24 and 2024-25 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.
Other Forecast Notes:
* Ranges provided for revenues and expenditures. Upper & lower ends of ranges increase slightly in the outer years of the forecast reflecting additional economic uncertainty in the later years.
* Ranges include pessimistic and optimistic scenarios within assumptions provided by the primary sources of economic information mentioned in this report.
* When a baseline deficit or surplus is projected, the next year’s operating expenses are assumed to be decreased or increased by the baseline deficit/surplus amount prior to applying the assumed annual
projected growth rate, as the City is required by Charter to balance the budget each year.

- 6 -

ATTACHMENT C

Forecast Assumptions

Economic Sources - Budget and Research staff relies on several different sources for economic
data and forecasts to assist with developing revenue and expenditure projections.

The list below includes the primary sources of information:
• State of Arizona Finance Advisory Committee (FAC) which includes several economists and
finance professionals from the private and public sectors
• State of Arizona Joint Legislative Budget Committee (JLBC)
• University of Arizona (UofA), Economic Business Research Center
• Global Insight, IHS
• Arizona State University (ASU) – WP Carey School of Business, and Western Blue Chip
• Arizona Department of Administration (ADOA) - Employment and Population Statistics Office
• JP Morgan Chase Economic Outlook Center
• Blue Chip Economic Indicators (BCEI)– National Level
• U.S. Bureau of Labor Statistics
• U.S. Census Bureau
• The Conference Board
• University of Arizona (UofA) Forecasting Project – A community-sponsored research program
within the Economic and Business Research Center providing project members with economic
forecasts for Arizona, the Phoenix-Mesa metro area, and the Tucson metro area. City staff
attends the Forecasting Project quarterly meetings and receives quarterly reports and
data/projections used to assist in developing our forecasts. Forecasting Project data relies on
Global Insight, IHS which is a well-known economics organization that provides
comprehensive economic and financial information. The data from this project is incorporated
into an econometric software program used to forecast sales tax.

Economic Outlook
The U.S. economy exhibited surprising resilience in the second half of 2022 after real GDP had
declined in each of the first two quarters and the war in Ukraine created a geopolitical crisis.
Historical high inflation not experienced since the early 1980s also occurred in 2022, primarily due
to pandemic-related federal stimulus and supply-chain issues. The Federal Reserve has been
tasked with maintaining stable price growth by increasing interest rates to tame inflation, which may
slow the economy. It is for this reason some economists forecast either a meaningful slowdown in
the 2023 economy or a mild recession. However, historic low unemployment and wage growth may
prevent a recession in the current year, which creates additional economic uncertainty.

At the national level, the Conference Board forecasts that economic weakness will intensify and
spread more widely throughout the U.S. economy over the coming months, leading to a recession
starting in early 2023. The estimated GDP is 0.2% for 2023 and 1.7% in 2024 (The Conference
Board, January 2023). In addition, only 18% of the BCEI forecasters think the Federal Reserve will
rein in inflation without precipitating a recession. More generally, the panel attaches a probability of
65% to a recession occurring in 2023 (BCEI, January 2023). However, the job report released in
January by the U.S. Department of Labor shows over 500,000 jobs created pushing the
unemployment rate down to 3.4 percent, the lowest level since 1969. This suggests the labor
market had been even more resilient in recent months, and some economists are now suggesting
the odds of a recession occurring in 2023 are falling, while other economists argue the strong job
market may cause the Federal Reserve to continue with aggressive rate hikes that will weaken the

- 7 -

economy. Beyond the high inflation rates and rapid monetary tightening, falling consumer and
business confidence, softening consumption and investment, the war in Ukraine, and supply-chain
issues are all likely to pose risks to the economy in 2023.

Arizona’s economy and revenue growth have outperformed the nation throughout the pandemic,
and this trend is expected to continue, albeit at a slower pace affected by the national economy.
According to the Governor’s presentation for the FY 2023-24 budget, Arizona ranked 5th in
personal income, 6th in GDP growth, 7th in job growth and 8th in population growth among all states.
The movement and expansion of high-tech manufacturing firms in Arizona will continue to promote
growth. However, Arizona has also experienced some of the highest inflation of all states because
of persistently high housing prices. Due to the impact of the national economy, a significant
slowdown in growth across all major economic indicators is anticipated for 2023, although Arizona
and Phoenix are expected to outperform the national economy.

Other significant economic assumptions from trusted sources include the following:
• Personal income for the Phoenix Metro area is projected to grow from 3.0% in 2022 to 5.5%
in 2023 and range from 5.8% to 6.6% from 2024 to 2028 (UofA Economic Business Research
Center).
• Growth in population is expected to continue, but at lower rates than historical growth.
Phoenix Metro population is projected to grow by the same rate of 1.7% in 2023 as in 2022
and range from 1.5% to 1.6% for the remaining forecast period (UofA Economic Business
Research Center).
• Non-farm employment in metro Phoenix is estimated to slow down from the growth of
4.1% in 2022 to 1.3% in 2023 and range from 1.4% to 2.2% from 2024 to 2028 (UofA
Economic Business Research Center).
• Arizona unemployment rate is estimated to increase from the rate of 3.5% in 2022 to 5.2%
in 2023 and range from 4.7% to 5.7% for the remaining forecast horizon (UofA Economic
Business Research Center).
• Arizona housing affordability declines due to home price inflation and interest rate hikes. In
addition, single-family and multi-family permits are projected to decrease by 11.4% and
26.8% in 2023, respectively (59th ASU/PNC Bank Economic Forecasting Luncheon,
November 2022).
• Inflation is expected to decelerate from 2022. The Consumer Price Index-All Urban Consumers
(CPI-U) West region is estimated to decline from 8.2% in 2022 to 4.2% in 2023 and range from
2.2% to 2.5% for the remaining forecast period (UofA Economic Research Center). In the past
50 years, CPI-U has ranged from negative 0.4% in 2009, to a high of 13.5% in 1980 ( U.S.
Department of Labor Bureau of Labor Statistics).

Resource Assumptions- Revenue growth rates are determined using information from our above-
mentioned trusted sources, analyzing actual revenue trends and averages, and factoring in any
known policy or legislative changes.

Revenue assumptions beyond the broader economic considerations are described below:
• No further period of recession with modest revenue growth for the forecast horizon.
• Annual revenue growth rates range from 0.7% to 10.2% during the forecast period.
• No impact to current revenue tax base, as provided in applicable state statutes and City
ordinances.

- 8 -

• The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus)
reduced the number of individual income tax brackets from 4 in Tax Year (TY) 2021 to
2 brackets in TY 2022. Starting from TY 2023, the individual income tax has been
reduced to 2.5%.
• Relative population share used in calculating state-shared revenues in FY 2023-24 was
based on the 2021 Census Bureau Population Estimate. It was projected to remain flat
throughout the forecast period. The actual share will change annually based on Census
Bureau Population Estimates. In addition, Laws 2021, Chapter 412 (Tax Omnibus)
increases the Urban Revenue Sharing distribution from 15% to 18% starting in FY 2023-24.
• No future fee increases or decreases and no new sources of revenue.
• Potential increases to revenue resulting from economic development efforts are not included in
the forecast.
• Ranges provided for revenues: upper and lower ends of ranges increase slightly in later years
of the forecast reflecting additional economic uncertainty.

Expenditure Assumptions- Assumptions regarding forecasted expenditures are described below:
• Annual operating expenditure growth rates, except for pension, are based on historical
growth rates and the estimated CPIs throughout the forecast period.
• Pension costs are based on historical actuals and information provided by the COPERS and
PSPRS actuaries. The forecast does not attempt to predict future pension liabilities, assets or
other plan assumptions, but rather to account for the anticipated costs of both pension
systems. COPERS’ pension costs in FY 2023-24 are based on the Alternative Contribution
Strategy provided by the system’s actuary, which assumes slightly higher contribution rates
as a strategy to pay down the unfunded COPERS pension liability sooner.
• The forecast does not include the impact of additional potential reform measures for COPERS
or PSPRS or the impact of pending litigation or proposed legislation.
• The forecast includes no additional future funding for program enhancements, unfunded
mandates, expiring grants, etc.
• Pay-as-you-go capital costs are based on the preliminary estimates in the five-year Capital
Improvement Program and include costs for facility major maintenance and building a new fire
station located at 19th Avenue and Chandler Boulevard, increases in funding for replacement
of critical IT infrastructure, and money earmarked for future expenses, including one-time funds
for costs of a potential General Obligation (GO) Bond Program and grant matching
requirements for the Bipartisan Infrastructure Bill.
• The contingency fund is set as 4.5% in FY 2023-24, 4.75% in FY 2024-25 and FY 2025-
26, and 5% for both FY 2026-27 and FY 2027-28 of the total General Fund operating
expenditures.
• The FY 2023-24 total compensation costs are based on projections under the current
Council- adopted pay plan ordinance and existing employee contracts. Estimated costs of
the Class and Comp study have been included in the forecast.
• No other financial impact from changes to labor unit contracts resulting from future
negotiations is assumed.
• In forecast years with a projected baseline deficit or surplus, the next year’s operating
expenses are assumed to decrease or increase by the baseline deficit/surplus amount prior to
applying the assumed annual growth projection, as the City is required by Charter to balance

- 9 -

the budget each year.

• Ranges provided for operating expenditures: upper and lower ends of ranges increase slightly
in later years of the forecast reflecting additional economic uncertainty.

Other Items that Could Impact the Base Budget or the Five-Year Forecast- The cost and revenue
items below either will likely require additional funding or could adversely impact revenue and
therefore could have a negative impact on the five-year forecast as it’s currently presented. The cost
items may need to be ultimately borne, in part or in whole, by the General Fund (GF) if no other
funding source is identified by the time these costs are imminent.

• On December 12, 2022, the City Council approved the proposed $500 million GO Bond
Program as presented by the Executive GO Bond Committee. Staff has begun next steps to
prepare election materials for City Council approval, and upon approval the GO Bond Program
will go before voters in the November 2023 Election. The forecast includes one-time funding
that could be used for initial operating costs and/or gap funding if needed. However, annual
ongoing operating costs from a proposed GO Bond Program have not been incorporated into
the forecast.

• The forecast reflects the continued funding of approximately $16 million per year earmarked to
address aging City infrastructure and critical equipment. Examples of these projects include
upgrades and replacements of fire life safety, electrical, and cooling systems in City facilities.
However, additional funding may be needed in future years to address facility needs. Also,
under the direction of the City Manager, staff continues to identify critical needs in all City
facilities and works with several external firms that specialize in facility assessments. Staff has
also taken active steps to enhance facility maintenance oversight by centralizing GF facility
maintenance funding and creating a review committee. This change has significantly
enhanced the prioritization of GF facility projects.

• General Fund vehicle funding is estimated at $33 million for FY 2023-24 and increases to $45
million in FY 2027-28 to reduce the current backlog of critical public safety vehicles and other
vehicles deferred during the Great Recession. The cost to replace vehicles and Fire
apparatus has grown significantly due to inflation, roughly 30% in the past two fiscal years per
the Public Works Department. For FY 2022-23, an additional $10 million in one-time funds will
be dedicated specifically to replacing critical Fire pumpers and ladder trucks. It should be
noted the current GF backlog of vehicles is estimated by Public Works at over 1,400 units with
a total backlog value of $146 million, and more vehicle replacement funding might be needed
during the forecast horizon.

• The Governor’s budget includes an $11.8 million transfer from the state General Fund to the
Arizona Department of Revenue (ADOR) to replace the outdated tax system, which is the
second of eight deposits. The City was required to share the cost, and the forecast includes an
annual payment from $1.1 million to $1.3 million through the forecast period. However, the
actual payments might be higher, as assessments for the future years will be determined
annually by ADOR based on the amounts paid.

- 10 -

• Beyond the potential risks and headwinds stated in the economic outlook section, several
proposed legislative bills listed below could also negatively impact revenue estimates and the
Five-Year Forecast if passed.

Residential Rental Sales Tax Exemption (HB 2067 and SB 1184):
Both House and Senate bills prohibit cities and towns from levying residential sales tax, but
with different effective dates. If HB 2067 passed, GF revenue would be reduced by an
estimated $199 million to $209 million, and all voter approved sales tax funds including
Transportation 2050, Parks and Preserves, and Public Safety Specialty funds would be
decreased by $381 million to $400 million over the five-year forecast horizon. Although SB
1184 involves a phase-in approach and has a less severe impact than HB 2067 during the
current forecast period, the effect is the same after January 1, 2028.

Corporate Income Tax Reduction (HB 2003):
This bill reduces the corporate income tax rate by 0.9% from 4.9% to 4.0% for 2023 and
continues to reduce the tax rate by 0.5% for each year thereafter until the rate reaches 2.5% in
2026. Due to the 2-year lag, the revenue reduction will start in FY 2025-26, and the total GF
loss is estimated at $56 million through FY 2027-28 based on the JLBC fiscal notes.

Vehicle License Tax (VLT) Only be Used for Transportation Purposes (SB 1245):
SB 1245 restricts all state shared VLT to transportation purposes, reducing the GF revenue by
an estimated $361 million to $379 million over the five-year forecast horizon.

Food Tax Exemption (HB 2061):
HB 2061 prohibits cities and towns from levying a food for home consumption tax. Although
the City does not currently collect sales tax on food for home consumption, we have in the
past as a strategy to balance the budget. If it were eliminated, this would prevent the City
Council in the future from electing this option if needed.

Beyond the items mentioned above, there are also a few bills which would negatively impact
property tax revenues and increase the amount of income tax credits, which would also
negatively impact stated-shared income tax collections.

- 11 -

ATTACHMENT D

Stress Testing for General Fund

Background – According to the National Bureau of Economic Research, the longest economic
expansion on record was ended by COVID-19 in February 2020. The COVID-19 recession is one of
the deepest but shortest in U.S. history. With federal stimulus packages and more than anticipated
revenue collections, the City was not forced to cut the budget. However, after two years of rapid,
stimulus-fueled growth, 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. Thus, stress testing is crucial, as it helps
estimate potential financial shortfalls resulting from adverse events. To help the City plan ahead,
avert or limit a fiscal emergency and keep long-term priorities on track, staff conducted stress testing
for the General Fund.

Methodology/Assumptions- "Stress test" in financial terminology, is an analysis or simulation
designed to determine the ability of a given entity to deal with an economic crisis. Instead of doing a
financial projection on a "best estimate" basis, a company or its regulators may do stress testing to
estimate how robust an entity performs in certain negative circumstances, a form of scenario
analysis. There are two scenarios for this stress testing: moderate and severe recession scenarios.

Attachment E shows a hypothetical moderate recession estimated to start in FY 2023-24. This
scenario assumes General Fund revenue, except state-shared income tax, will decline by 1% for two
consecutive years. According to Moody’s Analytics, a recession typically affects budgets for at least
two years (except for the COVID-19 recession, which was interfered with the federal stimulus
packages). Although a moderate recession may impact revenue by more than 1%, the model is
simulated with a 1% decrease. State-shared income tax distributed to cities and towns is based on
the collections from two years prior, so the state-shared income tax decrease due to a moderate
recession will not affect revenues until FY 2025-26.

Attachment F shows a hypothetical severe recession estimated to start in FY 2023-24. This scenario
assumes General Fund revenue, except state-shared income tax, will decline by 3% for three
consecutive years. Although a severe recession may impact revenues by more than 3%, for
simulation purposes, this stress test used a 3% decrease. Similar to the moderate scenario, the state-
shared income tax decrease caused by the economic recession will not affect revenues until FY 2025-
26.

Assumptions for recoveries, fund transfers and expenditures remain the same as the model shown in
Attachment B. However, the expenditures for the forecast period will be different due to the
methodology applied in the model. When a deficit or surplus is projected, the next year’s operating
expenses are assumed to be decreased or increased by the deficit/surplus amount prior to applying
the assumed annual projected growth rate, as the City is required by Charter to balance the budget
each year.

- 12 -

ATTACHMENT E
5-Year General Fund Forecast – Moderate Recession Scenario ($ Millions)
2022-23
Adopted
Budget
2023-24
Preliminary
Budget Estimate
2024-25
Forecast
For Planning Purposes Only
2025-26
2026-27
Forecast
Forecast
2027-28
Forecast
Resources
Local Taxes
$632
$664
$658 - $668
$684 - $705
$712 - $745
$739 - $786
State Shared Revenues
621
752
697 - 708
676 - 698
685 - 719
712 - 759
Primary Property Tax
199
198
195 - 198
201 - 207
207 - 217
213 - 228
User Fees and Other
135
149
146 - 148
147 - 152
149 - 156
152 - 160
Other (Carryover Balance, Transfers, Recoveries)
135
115
15
26
27
25
Unused Contingency from Prior Year
57
68
76
84
81
89 - 88
Total Resources
$1,779
$1,946
$1,787 - $1,813
$1,818 - $1,872
$1,861 - $1,945
$1,930 - $2,046
Expenditures
Operating Expenditures
$1,270
$1,241
$1,302 - $1,295
$1,235 - $1,227
$1,272 - $1,263
$1,300 - $1,289
Civilian Pension
107
112
106
107
114
116
Sworn Public Safety Pension
261
301
324
336
344
351
Contingency
68
76
84
81
89 - 88
91 - 90
Pay-As-You-Go Capital (Includes Technology Plan)
48
118
47
47
47
46
Minimum Vehicles
25
33
36
36
45
45
Total Expenditures
$1,779
$1,881
$1,899 - $1,892
$1,842 - $1,834
$1,911 - $1,901
$1,949 - $1,937
PROJECTED (DEFICIT)/SURPLUS:
$ -
$65
$(112) - $(79)
$(24) - $38
$(50) - $44
$(19) - $109
Key Resource Forecast Assumptions:
* The forecast assumes moderate recession in 2023-24 and 2024-25, no fee increases or decreases and no new revenue sources.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from 4 in Tax Year (TY) 2021 to 2 brackets in TY 2022. Starting from
TY 2023, the individual income tax has been reduced to 2.5%.

Other Forecast Notes:
* Ranges provided for revenues and expenditures. Upper & lower ends of ranges increase slightly in the outer years of the forecast reflecting additional economic uncertainty in the later years.
* Ranges include pessimistic and optimistic scenarios within assumptions provided by the primary sources of economic information mentioned in this report.
* When a baseline deficit or surplus is projected, the next year’s operating expenses are assumed to be decreased or increased by the baseline deficit/surplus amount prior to applying the assumed annual
projected growth rate, as the City is required by Charter to balance the budget each year.

- 13 -

ATTACHMENT F
5-Year General Fund Forecast – Severe Recession Scenario ($ Millions)
2022-23
Adopted
Budget
2023-24
Preliminary
Budget Estimate
2024-25
Forecast
For Planning Purposes Only
2025-26
2026-27
Forecast
Forecast
2027-28
Forecast
Resources
Local Taxes
$632
$649
$627 - $637
$607 - $627
$633 - $662
$656 - $698
State Shared Revenues
621
745
684 - 694
632 - 653
632 - 664
633 - 676
Primary Property Tax
199
194
187 - 190
180 - 186
185 - 195
191 - 205
User Fees and Other
135
146
140 - 142
134 - 139
136 - 143
138 - 146
Other (Carryover Balance, Transfers, Recoveries)
135
114
15
26
27
25
Unused Contingency from Prior Year
57
68
76
82
79 - 78
81 - 80
Total Resources
$1,779
$1,916
$1,729 - $1,754
$1,662 - $1,713
$1,692 - $1,769
$1,724 - $1,830
Expenditures
Operating Expenditures
$1,270
$1,241
$1,274 - $1,267
$1,176 - $1,169
$1,114 - $1,106
$1,131 - $1,121
Civilian Pension
107
112
106
107
114
116
Sworn Public Safety Pension
261
301
324
336
344
351
Contingency
68
76
82
79 - 78
81 - 80
82
Pay-As-You-Go Capital (Includes Technology Plan)
48
118
47
47
47
46
Minimum Vehicles
25
33
36
36
45
45
Total Expenditures
$1,779
$1,881
$1,870 - $1,862
$1,781 - $1,773
$1,745 - $1,736
$1,771 - $1,761
PROJECTED (DEFICIT)/SURPLUS:
$ -
$35
$(141) - $(108)
$(119) - $(60)
$(53) - $33
$(47) - $69
Key Resource Forecast Assumptions:
* The forecast assumes severe recession in 2025-26 and 2026-27, no fee increases and no new revenue sources.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from 4 in Tax Year (TY) 2021 to 2 brackets in TY 2022. Starting from
TY 2023, the individual income tax has been reduced to 2.5%.

- 14 -

ATTACHMENT G
Pension Cost Increases

The below chart illustrates the rise in General Fund (GF) pension costs for PSPRS and
COPERS. The forecast for fiscal years 2023-24 through 2027-28 is based on projected
employer contribution rates from the plan actuaries and on the valuations dated June 30, 2022.
Projected amounts account for changes made by the PSPRS Board, which updated the salary,
inflation, and demographic assumptions. The Board also continued the decrease in the payroll
growth assumption from 3.0% to 2.0% by a factor of 0.5% each fiscal year, resulting in
increased employer contribution rates. The projected amounts for COPERS in FY 2023-24
assume the employer rates are based on the Alternative Contribution Strategy recommended
by the system actuary to pay down the unfunded liability sooner.

10.0%
15.0%
20.0%
25.0%
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
17-18
Actuals
18-19
Actuals
19-20
Actuals
20-21
Actuals
21-22
Actuals
22-23
Budget
23-24
Forecast
24-25
Forecast
25-26
Forecast
26-27
Forecast
27-28
Forecast
MILLIONS
GF COPERS
GF Fire
GF Police
% of Expenditures