Attachment A - Multi-Year Forecast and Status Research Report 26-29.pdf
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RESEARCH REPORT
BUDGET AND RESEARCH DEPARTMENT
B.R. REPORT NUMBER
2026-12
DATE ISSUED
February 24, 2026
TO:
ED ZUERCHER
CITY MANAGER
FROM:
AARON MERTZ
BUDGET AND RESEARCH DIRECTOR
SUBJECT
MULTI-YEAR FORECAST AND FY 2026-27 PRELIMINARY GENERAL FUND BUDGET STATUS
BACKGROUND
Development and presentation of the multi-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 City management and Council to develop strategic
plans to ensure the continuation of City operations and optimize services to the community.
The multi-year forecast estimates future revenues and expenditures of the General Fund for the
current fiscal year through fiscal year 2028-29. 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 2026.
The General Fund (GF) multi-year forecast (Attachments B and C) is provided to the City
Council and the community for consideration and provides City policy makers with:
•
A strategic financial management best practice.
•
A framework for strategic decision-making to ensure a balanced budget each fiscal year.
•
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 expenditure assumptions are provided in Attachment
D.
The forecast is built on several assumptions outlined in Attachment D regarding:
•
The national, state, and local economy.
•
Population and job growth .
ATTACHMENT A
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•
Revenue and expenditure growth.
•
Impacts of anticipated increasing sworn public safety pension liabilities.
•
Effects of the State's action to eliminate residential rental sales tax effective January 2025
(Senate Bill 1131).
•
Effects of the State's action to reduce the individual income tax rate to the current flat tax of 2.5%
(Senate Bill 1828).
•
State-shared revenue reductions due to San Tan Valley’s incorporation.
•
Negative impact of Arizona’s income tax conformity with the One Big Beautiful Bill Act.
•
Ongoing costs for the Class and Compensation study.
•
Cost management practices.
Certain assumptions 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. To model
potential future budgetary scenarios under varying economic conditions, a range is provided for
resources and expenditures for the outer years of the forecast. 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.
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 affect 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 2026-27 could result in a $19
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 believe resources and expenditures will be for the current fiscal year and
the subsequent three 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.
GF Summary
For the first several years following the pandemic, strong economic performance, coupled with
inflationary pressures, supported growth in tax revenues. These gains were driven by higher
consumer prices, an expanding population, and rising income levels. However, the retail sector, the
City’s largest source of sales tax, has slowed since June 2022. In FY 2023-24, retail sales tax grew
by 3.1%, the slowest rate since FY 2012-13, and growth in FY 2024-25 was even more modest at
1.1%. This slowdown, combined with recent legislative changes, has negatively impacted overall
revenue collections. General Fund revenue reduction in the previous fiscal year totaled $59.4
million, representing a 3.1% decline compared to FY 2023-24. The reduction is primarily
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attributable to the State's elimination of the residential rental sales tax under Senate Bill (SB) 1131
and the implementation of a flat individual income tax rate of 2.5% under SB 1828. To address the
projected FY 2025-26 budget shortfall and maintain essential programs and services, the City
Council approved a revenue enhancement measure. On March 18, 2025, the Council authorized
an increase in the City Transaction Privilege Tax (TPT) and Use Tax rate from 2.3% to 2.8%,
effective July 1, 2025. However, significant economic uncertainty and a slowdown in sales tax
revenue collections in the first six months of FY 2025-26 require a cautious approach to
forecasting. The baseline revenue forecast projects a 4.1% increase for FY 2025-26 and a 3.4%
increase for FY 2026-27. This modest growth is mainly due to higher City TPT and Use Tax
revenues from the approved rate increase, though these gains are partially offset by reduced state-
shared revenues due to the San Tan Valley’s incorporation, lower state-shared income tax
collections resulting from the flat individual income tax rate, and the elimination of residential rental
sales tax.
Furthermore, the current state legislative session could impose additional fiscal challenges on the
City. The bills staff are currently monitoring are summarized on page 14 of this report and present a
potential negative impact of approximately $593 million if passed and signed into law.
Additionally, to better prepare for future challenges, this report includes stress testing of the baseline
forecast that incorporates tax conformity under moderate and severe recession scenarios, which is an
essential fiscal tool to evaluate how revenues might respond to different levels of economic crisis
(Attachments E, F and G).
OTHER INFORMATION
Staff are underway with the annual 7+5 expenditure and revenue technical review process and may
update estimates if necessary. The final estimates and recommendations to the City Council on how
best to allocate the GF surplus in FY 2026-27 to achieve a required balanced budget will be
presented in the proposed City Manager’s Trial Budget on March 24.
It is also worth noting the preliminary FY 2026-27 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 forecast, are not reflected, and would need to be addressed if adopted by the State.
General Fund FY 2026-27 Preliminary Budget Status
FY 2026-27 Resources - The chart below shows the preliminary resources projection:
GF Resource Category
2026-27
Preliminary
Estimate
(in millions)
2026-27
Preliminary
Projected Annual
Growth Rate %
Local Sales & Excise Taxes 1
$834
1.8%
State-Shared Revenue 2
$710
5.6%
Primary Property Tax 3
$232
4.1%
User Fees and Other
$211
1.9%
Unused Contingency/Set-Aside from PY 4
$201
N/A
Transfers/Recoveries/Carryover Balance 4
$101
N/A
Total GF Resources
$ 2,289
4.5%
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1 Reflects the negative impact to Local Sales & Excise taxes because of Senate Bill 1131, which
prohibits municipalities from taxing residential rental property starting January 1, 2025. Reflects 0.5
percentage point increase in the City TPT and Use Tax rates effective July 1, 2025.
2 Reflects the negative impact of San Tan Valley’s incorporation on State-Shared Sales Tax and Income
Tax revenues, and reflects the reduction in State-Shared Income Tax Revenue because of Senate Bill
1828, which reduces the individual income tax rates to a flat tax of 2.5% beginning in tax year 2022.
However, it does not reflect any impact on State-Shared Revenue resulting from the FY 2026-27 State
budget, nor legislative changes that have recently been proposed or discussed during the current
legislative session.
3 Assumes the continuation of the 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 or offset.
4 Estimates for unused contingency/set-aside from prior year (PY) and transfers/recoveries/carryover
balance 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 during the pandemic. 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 2026-27 estimate and the outer years of the forecast are based
on projections developed with the enhanced econometric forecasting model. Revenue estimates may
change as more data becomes available and will be finalized in the coming weeks.
GF Expenditures - The preliminary expenditure estimates may change as cost estimates are further
refined in the coming weeks. Currently, FY 2025-26 and FY 2026-27 General Fund operating
expenditure estimates excluding contingency are projected to be $1.944 billion and $2.038 billion,
respectively. The increase includes the ongoing costs for the Class and Compensation study, and
increased costs for sworn public safety pension liabilities, contractual services, and commodities. The
outer years of the forecast assume personal services expenditures, excluding pension and estimated
operating cost impacts for the voter-approved 2023 General Obligation Bond Program, contractual
services, commodities, capital outlay, internal charges and credits, and other expenses grow by an
inflationary factor. Further details on expenditure assumptions can be found in Attachment D.
Pension Costs – Expected changes in COPERS and PSPRS pension costs are as follows:
•
COPERS: GF pension costs in FY 2026-27 for civilian employees are estimated at $112
million and are expected to remain at $112 million in FY 2028-29. The overall stable trend in
COPERS pension cost has been driven by recent actuarial changes, plan earnings,
payroll growth and pension reform (Attachments B, C, and H).
•
PSPRS: GF pension costs in FY 2026-27 for sworn Police and Fire are estimated at $375
million and are expected to increase to $401 million in FY 2028-29. The primary factors
contributing to the growth are recent actuarial changes, plan earnings, and changes to the
payroll base. As the multi-year forecast shows, GF public safety pension costs are estimated
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to increase by $26 million from the FY 2026-27 through FY 2028-29 (Attachments B, C, and
H), which adds pressure to the GF budget going forward and limits the City's ability to either
expand programs and services to residents or increase employee compensation.
Contingency Fund (Rainy Day Fund) – The Contingency Fund is assumed to decrease from
$201 million in FY 2025-26 to $94 million in FY 2026-27, as the FY 2025-26 amount includes a
$109 million set-aside to balance the FY 2026-27 budget. The contingency rate remains at
4.75% for the entire forecast period. Contingency/rainy day funds provide one-time resources for
possible emergencies and unanticipated costs that may occur after the budget is adopted. The
possibility of natural disasters, public or employee safety emergencies, public health issues,
economic shocks or declines, and geopolitical events that can impact the broader economy
necessitates maintaining adequate contingency funds. The Government Finance Officers
Association (GFOA) recommends cities maintain reserve levels as a financial best practice and
according to the Pew Charitable Trust, research also shows that contingency/rainy day funds
can affect a government's credit rating, which in turn has an impact on borrowing costs and
operating expenses. The role of the contingency/rainy day funds is to improve a city or town's
monetary stability by building up a safety net in case of adversity. They offer the capability to
meet a monetary crisis without hindering public services. Without a contingency fund,
unforeseen emergencies or economic declines may create budget deficits requiring reductions to
programs and services.
The GF preliminary FY 2026-27 budget status and multi-year forecast are provided for
information purposes only.
ATTACHMENTS
Attachment B
Multi-Year General Fund Forecast
Attachment C
Multi-Year General Fund Forecast with Tax Conformity
Attachment D
Forecast Assumptions
Attachment E
Background, Methodology and Assumptions for Stress Testing
Attachment F
Stress Testing for Moderate Recession Scenario, with Tax Conformity
Attachment G
Stress Testing for Severe Recession Scenario, with Tax Conformity
Attachment H
Pension Cost Increases
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Multi-Year General Fund Forecast ($ Millions)
2025-26
Adopted
Budget
2026-27
Preliminary
Budget Estimate
For Planning Purposes Only
2027-28
2028-29
Forecast
Forecast
Resources
Local Taxes
$841
$834
$862 - $874
$889 - $916
State Shared Revenues
682
710
737 - 748
765 - 788
Primary Property Tax
223
232
240 - 243
249 - 257
User Fees and Other
191
211
213 - 217
216 - 222
Other (Set-Aside ,Carryover Balance, Transfers, Recoveries)
168
101
104
53
Unused Contingency/Set-Aside from Prior Year
89
201
94
101 - 100
Total Resources
$2,194
$2,289
$2,250 - $2,280
$2,273 - $2,336
Expenditures
Operating Expenditures
$1,422
$1,476
$1,565 - $1,554
$1,593 - $1,579
Civilian Pension
116
112
111
112
Sworn Public Safety Pension
359
375
399
401
Contingency/Set-Aside
201
94
101 - 100
103 - 102
Pay-As-You-Go Capital
74
49
36
31
Operating Costs for GO Bond Program
-
-
9
20
Vehicle Replacements
22
28
35
44
Total Expenditures
$2,194
$2,134
$2,256 - $2,244
$2,304 - $2,289
PROJECTED (DEFICIT)/SURPLUS:
$ -
$155
$(6) - $36
$(31) - $47
BASELINE FORECAST (DEFICIT)/SURPLUS:
$ -
$155
$15
$8
Key Resource Forecast Assumptions:
* The forecast assumes modest revenue growth with no recession from 2026-27 to 2028-29. The forecast includes the 0.5 percentage point increase in the City TPT and Use Tax rates effective July 1, 2025.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two 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 2026-27 was based on the 2024 Census Bureau Population Estimate. It was projected to remain flat throughout the forecast period
and accounts for the San Tan Valley’s incorporation. The actual share will change annually based on Census Bureau Population Estimates.
* The forecast includes residential rental transaction privilege tax reduction: Senate Bill 1131 prohibits municipalities from taxing residential rental property starting January 1, 2025.
Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.75% of the total General Fund operating expenditure from 2026-27 through 2028-29.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2026-27 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 Compensation study are 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 2026-27 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.
ATTACHMENT B
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Other Forecast Notes:
* Ranges provided for revenues and expenditures. The 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 ongoing 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 State Statute and Charter to balance the budget each year.
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Multi-Year General Fund Forecast with Tax Conformity ($ Millions)
2025-26
Adopted
Budget
2026-27
Preliminary
Budget Estimate
For Planning Purposes Only
2027-28
2028-29
Forecast
Forecast
Resources
Local Taxes
$841
$834
$862 - $874
$889 - $916
State Shared Revenues
682
710
737 - 748
765 - 788
Impact of Tax Conformity
-
-
(22)
(17)
Primary Property Tax
223
232
240 - 243
249 - 257
User Fees and Other
191
211
213 - 217
216 - 222
Other (Set-Aside, Carryover Balance, Transfers, Recoveries)
168
101
125
53
Unused Contingency/Set-Aside from Prior Year
89
201
94
101 - 100
Total Resources
$2,194
$2,289
$2,249 - $2,279
$2,256 - $2,319
Expenditures
Operating Expenditures
$1,422
$1,476
$1,565 - $1,554
$1,593 - $1,579
Civilian Pension
116
112
111
112
Sworn Public Safety Pension
359
375
399
401
Contingency/Set-Aside
201
94
101 - 100
103 - 102
Pay-As-You-Go Capital
74
49
36
31
Operating Costs for GO Bond Program
-
-
9
20
Vehicle Replacements
22
28
35
44
Total Expenditures
$2,194
$2,134
$2,256 - $2,244
$2,304 - $2,289
PROJECTED (DEFICIT)/SURPLUS:
$ -
$155
$(7) - $35
$(48) - $30
BASELINE FORECAST (DEFICIT)/SURPLUS:
$ -
$155
$14
$(9)
Key Resource Forecast Assumptions:
* The forecast assumes modest revenue growth with no recession from 2026-27 to 2028-29. The forecast includes the 0.5 percentage point increase in the City TPT and Use Tax rates effective July 1, 2025.
* The forecast reflects the projected fiscal impact of full tax conformity with the One Big Beautiful Bill Act, based on the Joint Legislative Budget Committee’s analysis dated December 5, 2025.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two 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 2026-27 was based on the 2024 Census Bureau Population Estimate. It was projected to remain flat throughout the forecast period
and accounts for the San Tan Valley’s incorporation. The actual share will change annually based on Census Bureau Population Estimates.
* The forecast includes residential rental transaction privilege tax reduction: Senate Bill 1131 prohibits municipalities from taxing residential rental property starting January 1, 2025.
Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.75% of the total General Fund operating expenditure from 2026-27 through 2028-29.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2026-27 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 Compensation study are 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 2026-27 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.
ATTACHMENT C
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Other Forecast Notes:
* Ranges provided for revenues and expenditures. The 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 ongoing 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 State Statute and Charter to balance the budget each year.
- 10 -
ATTACHMENT D
Forecast Assumptions
Economic Sources - Budget and Research staff relies on several different sources of 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 (EBRC)
•
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 (BLS)
•
U.S. Census Bureau
•
U.S. Bureau of Economic Analysis (BEA)
•
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
By the end of 2025, the U.S. economy displayed both resilience and underlying challenges. Real
gross domestic product (GDP) increased at an annual rate of 4.4% in the third quarter of 2025,
according to the updated estimate from the U.S. Bureau of Economic Analysis. The increase in real
GDP reflected increases in consumer spending, exports, government spending, and investment.
Still, the road to 2026 remains challenging. The Blue Chip Economic Indicators (BCEI) consensus
projects that real GDP will grow at a slower pace, with an estimated growth of 2.0% in 2026 and
2.1% in 2027. Forecasters anticipate continued consumer spending support, though at a slower
pace. Persistent uncertainties – including tariff policy shifts, geopolitical tensions, elevated
consumer debt, housing affordability constraints, labor market frictions, and inflationary pressures –
are to weigh on confidence and investment decisions.
Arizona’s future economic performance, along with that of Phoenix, will be closely tied to national
and global trends. Arizona’s economy continues to grow, though at a slower pace than usual. Job
gains are modest due to reduced hiring and slightly higher layoffs. Arizona’s nonfarm job growth
has decelerated, shifting from roughly 1.2% in 2024 to 0.6% in 2025, according to the U.S. Bureau
of Labor Statistics (BLS). Income levels are rising gradually, reflecting post-pandemic normalization
in employment costs. For the 12-month period ending September 2025, wages and salaries for
private industry workers increased 2.6% in the Phoenix Metropolitan Area, down from 3.4% in
September 2024.
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Despite these challenges, Arizona taxable retail sales, including remote sellers, increased by 4.3%
in December 2025. The rebound in taxable retail sales demonstrates resilient consumer activity.
However, December 2025 marked the fifth consecutive month with a year-over-year decline in
State TPT contracting revenue, primarily due to weakness in the residential construction sector.
After the COVID-19 pandemic, Arizona saw a surge in home and rent prices. Housing affordability
has remained a primary challenge for the state. Housing permit activity statewide has been weak
through the first eight months of 2025; seasonally adjusted total Arizona housing permits were
down 13.1% compared to the same period last year (EBRC Benchmark).
Looking ahead, the baseline forecast anticipates continued economic growth in Arizona in 2026,
supported by increased U.S. economic activity. However, gains are expected to remain modest
relative to historical trends due to federal policy uncertainty, higher costs from increased tariffs, and
demographic aging amid national immigration restrictions.
Other significant economic assumptions from trusted sources include the following:
•
Personal income growth for the Phoenix Metro area is projected to slightly increase from
5.7% in 2025 to 6.0% in 2026 and range from 6.2% to 5.6% from 2027 to 2029 (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 1.5% in 2026 and 2027, and 1.4% for the
remaining forecast period (UofA Economic Business Research Center).
•
Non-farm employment in metro Phoenix is estimated to increase from the growth of 0.9%
in 2025 to 1.6% in 2026 and range from 1.7% to 1.6% from 2027 to 2029 (UofA Economic
Business Research Center).
•
Arizona unemployment rate is estimated to increase from 4.1% in 2025 to 4.4% in 2026
and range from 4.5% to 4.3% for the remaining forecast horizon (UofA Economic Business
Research Center).
•
Arizona house price increases have slowed, but housing cost burdens remain elvated and
housing permit activity was down by 11.3% in 2025. Housing permits are projected to
slightly increase by 0.3% in 2026 and decline by 8.4% in 2027 (UofA Economic Business
Research Center).
•
Stabilizing house prices have contributed significantly to reduced consumer price inflation
in the Phoenix MSA, which is running well below the U.S. The Consumer Price Index-All
Urban Consumers (CPI-U) West region is estimated to slightly increase from 3.1% in 2025
to 3.2% in 2026 and range from 2.6% to 2.2% for the remaining forecast period (UofA
Economic Research Center).
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 enacted legislative changes.
Revenue assumptions for the baseline forecast 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 during the forecast period are expected to range from 3.4% to
4.1%.
•
The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced
the number of individual income tax brackets from four in Tax Year (TY) 2021 to two
brackets in TY 2022. Starting from TY 2023, the individual income tax has been reduced to
- 12 -
a 2.5% flat tax rate.
•
The relative population share used to calculate state shared revenues for FY 2026-27 is
based on the 2024 Census Bureau Population Estimate and has recently been adjusted
downward following the incorporation of San Tan Valley in September 2025 and its eligibility
for state-shared revenues. In addition, Laws 2021, Chapter 412 (Tax Omnibus) increased
the Urban Revenue Sharing distribution from 15% to 18% starting in FY 2023-24.
•
The forecast includes residential tax rate reduction starting on January 1, 2025. The State
recently enacted Senate Bill 1131, which prohibits municipalities from taxing residential
rental property.
•
The forecast includes the 0.5 percentage point increase in the City TPT and Use Tax rates,
effective July 1, 2025.
•
The forecast with tax conformity reflects the projected fiscal impact of full tax conformity with the
One Big Beautiful Bill Act, based on the Joint Legislative Budget Committee’s analysis dated
December 5, 2025.
•
Potential increases in 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 pensions, are based on historical
growth rates, estimated CPIs and account for the impact of the City Council approved Class
and Compensation (C&C) study 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.
•
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,
roadway safety, flood hazard mitigation, information technology, and money earmarked
for future expenses.
•
The contingency fund is set at 4.75% of the total GF operating expenditures from FY
2026-27 through FY 2028-29.
•
The FY 2026-27 total compensation costs are based on projections under the current
Council adopted pay plan ordinance and existing employee contracts. Any negotiated
labor increases will reduce the resources available for programs and services.
•
The Class & Compensation study continues to put upward pressure on personal services
costs as employees progress through the new pay scales.
•
No other financial impact from changes to labor unit contracts resulting from current or future
negotiations is assumed.
- 13 -
•
In forecast years with a projected baseline deficit or ongoing 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 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 Considerations to the Multi-Year Forecast - The items below will likely require additional
funding or could adversely impact the multi-year forecast as it is currently presented.
•
The forecast incorporates the estimated annual ongoing operating costs in FY 2027-28 and
FY 2028-29 for the voter approved 2023 General Obligation (GO) Bond Program totaling $29
million over the two fiscal years. These costs have been factored into the forecast; however,
further resources may still be required.
•
The forecast reflects the continued funding of approximately $21 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.
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
have 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. However, additional resources may be
required to adequately maintain city infrastructure.
•
GF vehicle funding is estimated at $28 million for FY 2026-27, $35 million in FY 2027-28, and
$44 million in FY 2028-29 to replace units in the fleet. Vehicle replacement costs have
experienced significant inflation in recent years. It should be noted the current GF backlog of
vehicles is estimated by Public Works at a value of $27 million, and more vehicle replacement
funding may be needed during the forecast horizon and beyond.
•
Additional costs to the GF are anticipated to further the City's effort to help individuals
experiencing homelessness upon the expiration of American Rescue Plan Act funds.
Preliminary projections indicate an ongoing funding requirement of approximately $18 million
beginning in FY 2026-27.
•
On November 5, 2024, Arizona voters passed Proposition 312. From January 1, 2025, through
December 31, 2035, the proposition allows property owners to apply for a primary property tax
refund from the Arizona Department of Revenue (ADOR) if they can document expenses
incurred due to a city's, town's, or county's failure to enforce certain laws or address a public
nuisance. The refund, which is equal to the documented expenses, is capped at the amount of
primary property taxes the owner paid to the municipality or county in the prior tax year and
can be requested annually. The State Treasurer will withhold state-shared revenues from the
affected City or county to cover the refund amount and reimburse ADOR for refund costs. The
City's expenses are unpredictable and depend on the volume of refund requests. While the
City has not noted significant impact from this action yet, it will monitor closely given the
impact of any state shared revenue loss.
•
Beyond the potential risks and headwinds stated in the economic outlook section, several
proposed legislative bills would significantly reduce City revenues. For bills that can be
quantified with available information, the estimated impact to City revenue is approximately
$593 million per year (See Attachment D1 for details), weakening the City's financial position.
Additionally, some bills may increase expenditures, requiring additional resources and further
straining the City's budget. If passed, these changes could significantly affect the multi-year
forecast.
- 14 -
ATTACHMENT D1
Proposed Legislation Current Session – Negative Revenue Impacts
SB 1106, SB 1638, and HB 2785 – Arizona state tax conformity with Federal 2025 tax changes
(estimated $21,500,000 reduction beginning FY 2027-28)
SB 1745 – Municipalities local excise tax rate limit (estimated $229,000,000 reduction beginning
FY 2026-27)
HB 2011 – expands allowable deductions from Arizona gross income (estimated $540
reduction beginning FY 2028-29)
HB 2269 – Tax deduction on gross proceeds/income from gas and electricity retail sales
(estimated $9,400,000 reduction beginning FY 2026-27)
HB 4096 – Withhold state shared revenue to compensate property owners for diminution in
property values caused by zoning ordinances or other City actions ($333,000,000 reduction
per year from FY 2026-27 to FY 2028-29)
- 15 -
ATTACHMENT E
Stress Testing
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. The City exhibited remarkable
economic resilience during the pandemic. However, several risks currently threaten national and
local economies, potentially triggering a recession or economic slowdown. 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.
The stress test model also accounts for the anticipated fiscal impact of full tax conformity with the
One Big Beautiful Bill Act, as outlined in the Joint Legislative Budget Committee’s analysis dated
December 5, 2025.
Attachment F shows a hypothetical moderate recession estimated to start in FY 2026-27. This
scenario assumes that 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 2 years prior, so the state-shared income tax decrease due to a moderate
recession will not affect revenues until FY 2028-29.
Attachment G shows a hypothetical severe recession that is estimated to start in FY 2026-27. This
scenario assumes that 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 2028-
29.
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.
- 16 -
Multi-Year General Fund Forecast – Moderate Recession Scenario, with Tax Conformity ($ Millions)
2025-26
Adopted
Budget
2026-27
Preliminary
Budget Estimate
For Planning Purposes Only
2027-28
2028-29
Forecast
Forecast
Resources
Local Taxes
$841
$806
$789 - $801
$814 - $839
State Shared Revenues
682
693
704 - 715
709 – 731
Impact on Tax Conformity
-
-
(22)
(17)
Primary Property Tax
223
220
217 - 220
249 - 257
User Fees and Other
191
202
198 - 201
200 - 207
Other (Set-Aside, Carryover Balance, Transfers, Recoveries)
168
91
131
53
Unused Contingency/Set-Aside from Prior Year
89
201
94
98
Total Resources
$2,194
$2,213
$2,111 - $2,140
$2,106 - $2,168
Expenditures
Operating Expenditures
$1,422
$1,474
$1,510 - $1,500
$1,467 - $1,456
Civilian Pension
116
112
111
112
Sworn Public Safety Pension
359
375
399
401
Contingency/Set-Aside
201
94
98
97
Pay-As-You-Go Capital
74
49
36
31
Operating Costs for GO Bond Program
-
-
9
20
Vehicle Replacements
22
28
35
44
Total Expenditures
$2,194
$2,132
$2,198 - $2,188
$2,172 - $2,161
PROJECTED (DEFICIT)/SURPLUS:
$ -
$81
$(87) - $(48)
$(66) - $7
BASELINE FORECAST (DEFICIT)/SURPLUS:
$ -
$81
$(68)
$(29)
Key Resource Forecast Assumptions:
* The forecast assumes moderate recession in 2026-27 and 2027-28. The forecast includes the 0.5 percentage point increase in the City TPT and Use Tax rates effective July 1, 2025.
* The forecast reflects the projected fiscal impact of full tax conformity with the One Big Beautiful Bill Act, based on the Joint Legislative Budget Committee’s analysis dated December 5, 2025.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two 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 2026-27 was based on the 2024 Census Bureau Population Estimate. It is projected to remain flat throughout the forecast period
and accounts for the San Tan Valley’s incorporation. The actual share will change annually based on Census Bureau Population Estimates.
* The forecast includes residential rental transaction privilege tax reduction: Senate Bill 1131 prohibits municipalities from taxing residential rental property starting January 1, 2025.
Key Expenditure Forecast Assumptions:
* The contingency fund is set at 4.75% of the total General Fund operating expenditures from 2026-27 through 2028-29.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2026-27 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 Compensation study are 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 2026-27 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.
ATTACHMENT F
- 17 -
Other Forecast Notes:
* Ranges provided for revenues and expenditures. The 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.
- 18 -
Multi-Year General Fund Forecast – Severe Recession Scenario, with Tax Conformity ($ Millions)
2025-26
Adopted
Budget
2026-27
Preliminary
Budget Estimate
For Planning Purposes Only
2027-28
2028-29
Forecast
Forecast
Resources
Local Taxes
$841
$787
$753 - $765
$729 - $752
State Shared Revenues
682
686
689 - 700
664 – 686
Impact on Tax Conformity
-
-
(22)
(17)
Primary Property Tax
223
216
208 - 211
200 - 207
User Fees and Other
191
198
190 - 193
183 - 188
Other (Set-Aside, Carryover Balance, Transfers, Recoveries)
168
90
97
53
Unused Contingency/Set-Aside from Prior Year
89
201
94
98
Total Resources
$2,194
$2,178
$2,009 - $2,038
$1,910 - $1,967
Expenditures
Operating Expenditures
$1,422
$1,474
$1,510 - $1,500
$1,362 - $1,351
Civilian Pension
116
112
111
112
Sworn Public Safety Pension
359
375
399
401
Contingency/Set-Aside
201
94
98
97
Pay-As-You-Go Capital
74
49
36
31
Operating Costs for GO Bond Program
-
-
9
20
Vehicle Replacements
22
28
35
44
Total Expenditures
$2,194
$2,132
$2,198 - $2,188
$2,062 - $2,051
PROJECTED (DEFICIT)/SURPLUS:
$ -
$46
$(189) - $(150)
$(152) - $(84)
BASELINE FORECAST (DEFICIT)/SURPLUS:
$ -
$46
$(170)
$(118)
Key Resource Forecast Assumptions:
* The forecast assumes severe recession from 2026-27 to 2028-29. The forecast includes the 0.5 percentage point increase in the City TPT and Use Tax rates effective July 1, 2025.
* The forecast reflects the projected fiscal impact of full tax conformity with the One Big Beautiful Bill Act, based on the Joint Legislative Budget Committee’s analysis dated December 5, 2025.
* The forecast includes tax rate reduction: Laws 2021, Chapter 412 (Tax Omnibus) reduced the number of individual income tax brackets from four in Tax Year (TY) 2021 to two 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 2026-27 was based on the 2024 Census Bureau Population Estimate. It is projected to remain flat throughout the forecast period
and accounts for the San Tan Valley’s incorporation. The actual share will change annually based on Census Bureau Population Estimates.
* The forecast includes residential rental transaction privilege tax reduction: Senate Bill 1131 prohibits municipalities from taxing residential rental property starting January 1, 2025.
Key Expenditure Forecast Assumptions:
* The contingency fund is set at 4.75% of the total General Fund operating expenditures from 2026-27 through 2028-29.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2026-27 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 Compensation study are 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 2026-27 assume expenditure growth is in line with recent historical averages, and the out years are anticipated to align with the estimated CPI growth.
ATTACHMENT G
- 19 -
Other Forecast Notes:
* Ranges provided for revenues and expenditures. The 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.
- 20 -
ATTACHMENT H
Pension Cost Increases
The chart below illustrates the rise in General Fund (GF) pension costs for PSPRS and
COPERS. The forecast for fiscal years 2025-26 through 2028-29 is based on information from
plan actuaries and on the valuations dated June 30, 2025. Projected amounts account for
updated salary, inflation, and demographic data. The PSPRS Board continued the decrease in
the payroll growth assumption from 1.5% to 0.75%, resulting in an increase to the employer
contribution rate.
$324
$338
$364
$439
$442
$466
$486
$510
$512
24.2%
23.0%
22.4%
23.8%
22.8%
24.0%
23.9%
23.7%
23.4%
15%
17%
19%
21%
23%
25%
27%
29%
$0
$100
$200
$300
$400
$500
$600
Actuals
FY20-21
Actuals
FY21-22
Actuals
FY22-23
Actuals
FY23-24
Actuals
FY24-25
Forecast
FY25-26
Forecast
FY26-27
Forecast
FY27-28
Forecast
FY28-29
General Fund Pension Forecast
GF COPERS
GF Fire PSPRS
GF Police PSPRS
% of GF Expenditures
$46M Increase FY25-26 to FY28-29