Five-Year General Fund Forecast

This report transmits the preliminary status for the General Fund (GF) fiscal year (FY)
2022-23 budget and a five-year GF forecast through FY 2026-27 (Attachments A
and B). The five-year forecast is being presented to the Mayor and City Council for the
12th consecutive year and provides an essential tool in long-term budget discussions
and decision making.

THIS ITEM IS FOR INFORMATION AND DISCUSSION.

Summary
In spite of the COVID-19 pandemic, the City has done remarkably well from a revenue
and expenditure perspective resulting in a projected GF surplus for FY 2022-23 of $76
million. Under the leadership of the City Council, strategic use of Coronavirus Relief
Funds coupled with tight controls on expenses and strong revenue growth have
resulted in additional GF resources. The preliminary $76 million surplus is made up of
estimated one-time resources of approximately $44 million and $32 million in ongoing
resources. The one-time resources include excess salary savings caused by a
significant increase in vacancies, and carryover of the Council-approved transfer of
funding from the Coronavirus Relief Fund (CRF) to the General Fund to offset public
safety salaries as permitted by the Federal guidelines. These funds were budgeted to
be used to pay for the negotiated compensation increases for fiscal years 2021-22 and
2022-23, and the additional programs and services added in the current year budget.

As mentioned above, the preliminary FY 2022-23 GF surplus is made up of one-time
resources estimated at $44 million, and ongoing resources estimated at $32 million in
order for the budget to remain structurally balanced. These resources could be used to
provide new or expanded programs and services in Council and community priority
areas, establish set-asides to provide future employee compensation increases and to
cover anticipated costs from the citywide classification and compensation study. In
order to maintain a structural balance and prevent future deficits, it is critical that the
City does not use one-time resources to fund ongoing costs, especially considering we
are still dealing with uncertainties of the pandemic and volatile revenue collections.
Staff will be updating revenue and expenditure estimates in the coming weeks, and will
bring back final estimates and recommendations on responsible cost additions using


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the combination of one-time and ongoing projected resources on March 15 with the
City Manager's Trial Budget.

General Fund Status and Forecast

FY 2022-23 The forecast shows a structurally balanced budget, where ongoing
resources are available for existing programs (Attachment A). However, staff is
mindful of the pandemic and how it may continue to impact the City's budget. This
uncertainty calls for a cautious approach to forecasting future revenues to ensure that
the City can sustain a balanced budget into the future. The GF preliminary estimated
resources in FY 2022-23 are expected to increase 6.4 percent to $1.769 billion from
FY 2021-22. GF revenue is estimated to increase 9.5 percent in FY 2022-23 and is
largely due to growth from known state shared income tax revenues, which are based
on collections from FY 2020-21. The State deferred income tax filings in the 4th
quarter of FY 2019-20 to FY 2020-21 due to the pandemic, which artificially increases
collections for FY 2022-23. Information on each resource category is detailed in
Attachment A.

The preliminary expenditure projections may change as cost estimates are further
refined in the coming weeks; however at this time the preliminary FY 2022-23 GF
expenditures to continue existing levels of service are projected to be $1.693 billion.
This compares to the adopted GF expenditure budget of $1.608 billion for FY 2021-22,
or an increase of $85 million. The increase accounts primarily for higher costs
associated with negotiated employee compensation packages, pension, increases in
capital equipment and pay-as-you-go projects, and higher contingency amounts.

For FY 2022-23, combined GF civilian (COPERS) and sworn (PSPRS) pension costs
are expected to increase by approximately $24 million as compared to the FY 2021-22
budget. PSPRS pension costs account for approximately $15 million of the total
increase, and COPERS pension costs account for $9 million of the increase. Over the
forecast horizon through FY 2026-27 total GF employee pension costs are forecasted
to increase $61 million (Attachment F).

The FY2022-23 preliminary GF budget includes increases for capital pay-as-you-go
projects of $21 million from the FY 2021-22 budget primarily for funding information
technology projects including funds to procure a new time and labor management
system, and modernization of the phoenix.gov website. Funding is also included for
stormwater drainage projects and to build out Fire Station 62 located at 99th Avenue
and Lower Buckeye Road to accommodate a future Crisis Response unit for the
Community Assistance Program (CAP). Additionally, funding for vehicle replacements
is increased from $15 million to $25 million in FY 2022-23 to reduce the backlog of GF


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units currently valued at $156 million, and will be used primarily to procure critical Fire
apparatus and other public safety vehicles.

The FY 2022-23 preliminary GF budget also accounts for the contingency fund
increasing from $57 million to $68 million to reflect 4.25 percent of operating
expenditures. It is increased by 0.25 percent each year thereafter until five percent is
achieved in FY 2025-26. In March 2010, the City Council agreed to gradually increase
the contingency with a goal of achieving five percent of GF operating expenses.
Achieving this goal will improve the City’s ability to withstand potential future economic
declines.

Overall, projected GF non-pension operating expenditures (not including pay-as-you-
go, vehicles or contingency) for FY 2022-23 have been planned and manageable,
increasing by only 1.6 percent or $19 million from the FY 2021-22 budget. The
increase represents expected growth in personnel services costs, required contractual
costs to provide existing programs and services, and capital replacement needs of
critical public safety equipment for the Fire Department. Funding is also included for
the Information Security and Privacy Office to protect City infrastructure from ever
increasing cybersecurity threats, and to cover increased contractual expenses for
existing software applications. Technology has become increasingly critical to not only
protecting City systems and assets from security threats, but to service delivery
requiring a dedication of additional resources to support City Council goals, such as
myPHX311, the Open Data portal, records management systems, and public Wi-Fi for
residents.

FY 2022-23 and Beyond
The attached Five Year Forecast and Preliminary GF Status Report includes
economic, resource and expenditure assumptions used to develop the multi-year
forecast (Attachment B). The report also includes possible risks and potential
unfunded needs. The model illustrates the GF baseline (midpoint) forecast (
Attachment A) reflects a balanced budget. As we look ahead, areas which could
impact the GF include revenue volatility, continued pension increases for public safety,
public demand for increased services, higher costs for employee compensation,
impacts from State legislative actions, and unfunded mandates. The current forecast
assumes no changes to existing labor contracts or service levels. It does, however,
assume any surplus is incorporated into the subsequent years' expenditures, whether
in increased one-time and ongoing costs for added programs and services, labor
increases, set-asides, or other uses of the funds. The current labor contracts expire at
the end of FY 2022-23 and contract negotiations will begin in December 2022. The
City is also currently working with a consultant on a Citywide classification and
compensation study, which is expected to result in increased costs to ensure the City


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can attract and retain employees. It is essential that a conservative approach be taken
to spending so that resources may be available to provide for increased future costs
and to ensure a continued balanced budget.

This report also includes stress testing of the forecast (Attachments C through E),
which has been done for the fourth consecutive year, to model the potential for a
recession in the last two years of the forecast. While this is not anticipated to occur in
the near term, the alternative models provide an opportunity to evaluate how declines
in revenue could compromise the GF's structurally balanced budget.

Additionally, under the direction of the Mayor and City Council, staff has been
exploring a potential 2023 General Obligation (GO) Bond Program that could address
critical systems and other City infrastructure. Staff plans to propose the scope and
committee structure for a GO Bond Program to Mayor and City Council at a future
meeting. The program would require voter approval at the November 2023 general
election. The forecast does not assume any increased operating cost impacts for new
facilities or capital projects from a potential GO bond program.

Next Steps and Community Input
The Phoenix City Charter requires a balanced budget each year. On March 15, a
balanced City Manager’s Trial Budget will be presented for Council and Community
discussion along with the Preliminary Five-Year Capital Improvement Program (CIP).
The CIP budget will present options for debt service payments and one-time capital
requests. This year staff plans to continue the practice of seeking community input on
the proposed budget with several opportunities for residents to provide feedback
through virtual Community Budget Hearings to be held during the month of April. In
addition, staff will make available to all residents the budget balancing tool, FundPHX,
which will include the proposed City Manager's Trial Budget. Residents are also
welcome to contact the Budget and Research Department directly to provide input or
ask questions about the budget (contact information is available on our website
Phoenix.gov/budget). Feedback received from residents will be provided to the Council
regularly as staff progresses through the budget adoption process.

Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research
Department.




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B.R. REPORT NUMBER
2022-08
RESEARCH REPORT
BUDGET AND RESEARCH DEPARTMENT DATE ISSUED
February 11, 2022
TO: FROM:
JEFF BARTON AMBER WILLIAMSON
CITY MANAGER BUDGET AND RESEARCH DIRECTOR
SUBJECT
FIVE-YEAR FORECAST AND PRELIMINARY GENERAL FUND STATUS FOR FY 2022-23



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 City Management and Council to develop strategic plans to
ensure the continuation of city 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 2026-27. 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 2022.

The General Fund (GF) five-year forecast (Attachment A) 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
B.

The forecast is built on several assumptions outlined in Attachment B regarding:
• The national, state and local economy
• Possible continued impacts to City revenues from the coronavirus pandemic



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• Population and job growth
• Revenue growth
• Impacts of anticipated increasing pension liabilities
• 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, legislative 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 2022-23 can result in a $14.5
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 two years since COVID-19 began in December 2019 and Phoenix has
emerged as an economic leader in the country. Higher than anticipated city and state sales taxes,
and one-time resources from Federal COVID-19 aid, have resulted in a positive General Fund
balance. Federal assistance from the Coronavirus, Relief, and Economic Security Act (CARES) and
the American Rescue Plan Act (ARPA) provided a tremendous amount of one-time stimulus aid to the
national, state and local economies, which has temporarily created significant increases in revenue
collections. The fiscal outlook for the remainder of FY 2021-22 and looking ahead to FY 2022-23
remains strong, but with some uncertainties. The FY 2022-23 ending General Fund balance is
estimated to be $76 million (Attachment A), with approximately $44 million from one-time resources
and $32 million representing ongoing resources. Staff will bring recommendations on how best to
utilize the surplus to the City Council on March 15th in the proposed FY 2022-23 Trial Budget. To
better prepare for future challenges, this report also includes stress testing for moderate and severe
recessions of the GF, which is an essential fiscal tool to evaluate how revenues might respond to
different levels of economic crisis (Attachment C, D and E).


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OTHER INFORMATION
It is important to note that the preliminary FY 2022-23 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 2022-23 Preliminary Budget Status

FY 2022-23 Resources- The chart below shows the preliminary resources projection:
2022-23 2022-23
Preliminary Preliminary
Estimate Projected Annual
GF Resource Category (in millions) Growth Rate %
Local Sales & Excise Taxes $633 3.4%
State-Shared Revenue 1 $621 20.4%
Primary Property Tax 2 $199 4.2%
User Fees and Other $135 2.8%
Beginning Balance 3 $175 N/A
Transfers/Recoveries 3 $6 N/A
Total GF Resources $ 1,769 6.4%

1 Does not reflect any impact to State-Shared Revenue resulting from the FY

2022-23 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 Drs. Hammond and Charney 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 2022-23 estimate and
the out years of the forecast are based on projections developed with the enhanced econometric
forecasting model.

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2022-23 Expenditures - The preliminary expenditure estimates may change as cost estimates are further
refined in the coming weeks. At this time, the preliminary FY 2022-23 General Fund expenditures are
projected to be $1.693 billion, representing an increase of $85 million over the FY 2021-22 budget. The
increase accounts primarily for higher costs for employee compensation and pension, 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 2022-23 for civilian employees are expected to
increase approximately $9 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 $1 million from the FY 2021-22 Budget through FY 2026-
27 (Attachment F), and the peak cost will be in FY 2022-23 as the estimated pension
contribution rates decrease from FY 2023-24 to FY 2026-27.

• PSPRS: GF pension costs in FY 2022-23 for sworn Police and Fire are expected to increase
approximately $15 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. Pension costs have also been impacted by
repealed pension reform measures. As the five-year forecast shows, public safety pension
costs are estimated to increase $47M from the FY 2021-22 Budget through FY 2026-27
(Attachment F), which adds significant pressure to the GF budget going forward and limits
the City’s ability to expand program and services to residents.

Contingency – The contingency fund is assumed to increase from $57 million to $68 million in FY
2022-23 to reflect 4.25% of operating expenditures. It is increased by 0.25% each year thereafter
until 5% is achieved in FY 2025-26. In March 2010, the City Council agreed to gradually increase
the contingency with a goal of achieving 5% 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 15.

The GF preliminary FY 2022-23 budget status and Five-Year Forecast are provided for
information and discussion.

ATTACHMENTS

Attachment A- Five-Year General Fund Forecast

Attachment B- Forecast Assumptions

Attachment C- Background, Methodology and Assumptions for Stress Testing

Attachment D- Stress Testing for Moderate Recession Scenario

Attachment E- Stress Testing for Severe Recession Scenario

Attachment F- Pension Cost Increases
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ATTACHMENT A
5-Year General Fund Forecast ($ Millions)
2021-22 2022-23 For Planning Purposes Only
Adopted Preliminary 2023-24 2024-25 2025-26 2026-27
Budget Budget Estimate Forecast Forecast Forecast Forecast
Resources
Local Taxes $550 $633 $659 - $668 $685 - $706 $712 - $745 $741 - $788
State Shared Revenues 496 621 673 - 683 651 - 670 664 - 695 663 - 705
Primary Property Tax 191 199 205 - 208 211 - 217 217 - 227 224 - 238
User Fees and Other 118 135 136 - 138 138 - 142 139 - 146 141 - 150
Other (Carryover Balance, Transfers, Recoveries) 197 124 49 20 24 22
Unused Contingency from Prior Year 56 57 68 76 80 86 - 85
Total Resources $1,608 $1,769 $1,790 - $1,814 $1,781 - $1,831 $1,836 - $1,917 $1,877 - $1,988
Expenditures
Operating Expenditures $1,172 $1,191 $1,283 - $1,277 $1,275 - $1,266 $1,302 - $1,294 $1,377 - $1,365
Civilian Pension 94 103 101 99 95 95
Sworn Public Safety Pension 245 260 277 289 290 292
Contingency 57 68 76 80 86 - 85 89
Pay-As-You-Go Capital (Includes Technology Plan) 25 46 40 45 45 44
Minimum Vehicles 15 25 25 25 25 25
Total Expenditures $1,608 $1,693 $1,802 - $1,796 $1,813 - $1,804 $1,843 - $1,834 $1,922 - $1,910
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PROJECTED (DEFICIT)/SURPLUS: $- $76 $(12) - $18 $(32) - $27 $(7) - $83 $(45) - $78

Key Resource Forecast Assumptions:
* The forecast assumes modest revenue growth with no recession from 2023-24 to 2026-27, no fee increases or decreases and no new revenue sources.
* The forecast includes Tax Rate Reduction: Laws 2021, Chapter 412 (Tax Omnibus), reduces the current Individual Income Tax (IIT) brackets to 2 starting in Tax Year (TY) 2022. The forecast also includes
the 4.5% Maximum IIT Rate: Law 2021, Chapter 411, imposes a maximum combined (regular plus Prop. 208) IIT rate of 4.5% on taxable income above $250K/$500K. The forecast also includes the
Alternative Tax Rate (SB 1783), imposes an alternative tax rate phased down from 3.5% in TY 2021 to 2.5% in TY 2025 on taxable income.
* Relative population share used in calculating state shared revenues in 2022-23 was based on the 2020 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 2023-24.

Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.25% in 2022-23, 4.5% in 2023-24, 4.75% in 2024-25, and 5% for both 2025-26 and 2026-27 of the total General Fund operating expenditures.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2022-23 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. Pension costs are based on required and projected contribution rates provided by the respective pension system actuaries and uses the Alternative Contribution Strategy for COPERS.
* Non-personnel related expenditures for 2023-24 and beyond assume expenditure growth is in line with recent historical averages.


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.


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ATTACHMENT B

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 – National Level
• U.S. Bureau of Labor Statistics
• U.S. Census Bureau
• Phoenix Business Journal
• 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 has been on a roller coaster ride the past two years, as coronavirus and the
emergency government response to it brought on both the sharpest, shortest recession in history
as well as the fastest growth in nearly 40 years. The consensus from trusted sources is the
economic recovery from the pandemic will continue to be robust, albeit a slowdown from 2021.

At the national level, the Conference Board forecasts that the U.S. GDP will grow by 3.5% in 2022
and 2.9% in 2023 (The Conference Board, January 2022). Although the overall economy is
expected to expand continuously, several factors pose risks to the forecast, including the ongoing
public health crisis, inflation, global supply chain issues, and labor shortages. As of January 2022,
the highly transmissible Omicron variant accounted for more than 95 percent of sequenced COVID
cases in the United States, according to data from the Centers for Disease Control and Prevention.
Even though COVID cases and hospitalizations started trending down in February, other COVID
variants may halt the economic recovery. In addition to the COVID threat, inflation remains the
most significant economic concern in 2022. The U.S. Bureau of Labor Statistics CPI for All Urban
Consumers rose 7.0 percent before seasonal adjustment for the 12 months ending December, the
most significant 12-month increase since the period ending June 1982. According to the Blue Chip
forecast panel, the supply-chain constrain will continue to impose upward pressure on inflation
through at least three-quarters of 2022. (Blue Chip Economic Indicators, Vol. 47, No. 1 January
2022). Along with the shortages of materials and goods, the large number of unfilled jobs is another
headwind of the economy. It is estimated that more than 10 million jobs are going unfilled in the
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country, and the national labor force participation rate has still not returned to the pre-pandemic
level (The Monday Morning Quarterback, January 10th, 2022). According to the Bureau of Labor
Statistics, the January 2022 labor force participation rate was 62.2%, 1.2% below the pre-COVID
level of 63.4% in January 2020. Although the percentage difference is minimal, it accounts for
millions of people.

Arizona’s economy and revenue growth have outperformed the nation throughout the pandemic,
and this trend is expected to continue. As of November 2021, Arizona replaced 101% of the jobs
lost during the pandemic (Office of the Governor News Release, December 2021). Arizona was
also ranked third in population growth in 2021 according to the U.S. Census. Additionally, Arizona
has experienced strong housing demand and a significant increase in prices. Year-to-date as of
September 2021, single family permits were up by 23% and multi-family permits grew by 5.6% (58th
Annual Economic Forecast Luncheon, December 2021).

Other significant economic assumptions from trusted sources built into this forecast include the
following:
• Personal income for the Phoenix Metro area is projected to grow only 0.2% in 2022 due to
federal assistance which caused a high base in 2021 of 6.6% and range from 5.8% to 6.4%
from 2023 to 2027 (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 from 1.8% in 2021 to 2.0% in 2022 and range
from 1.6% to 1.9% for the remaining forecast period (UofA Economic Business Research
Center).
• Non-farm employment in metro Phoenix is estimated to grow from 3.3% in 2021 to 3.7% in
2022 and range from 2.0% to 2.6% from 2023 to 2027 (UofA Economic Business
Research Center).
• Arizona unemployment rate is estimated to fall from the current rate of 6.4% to 5.5% in
2022 and range from 4.7% to 4.9% for the remaining forecast horizon (UofA Economic
Business Research Center).
• The near-term outlook for real estate in Greater Phoenix remains optimistic. Single-family
residential permits are projected to increase by 5% in 2022, although multi-family permits
in 2022 are expected to be lower than 2021 (ASU W.P. Carey School of Business-
Greater Phoenix Blue Chip Forecast/ Economic Forecasting Luncheon, December 2021).
• Inflation is expected to decelerate from 2021. The Consumer Price Index-All Urban Consumers
(CPI-U) West region is estimated to be 4.7% in 2022 and range from 2.1% to 2.3% 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 1.5% to 9.5% during the forecast period.
• No impact to current revenue tax base, as provided in applicable state statutes and City
ordinances.
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• The forecast includes Tax Rate Reduction: Laws 2021, Chapter 412 (Tax Omnibus),
reduces the current Individual Income Tax (IIT) brackets to 2 starting in Tax Year (TY)
2022. The forecast also includes the 4.5% Maximum IIT Rate: Law 2021, Chapter 411,
imposes a maximum combined (regular plus Prop. 208) IIT rate of 4.5% on taxable
income above $250K/$500K. The forecast also includes the Alternative Tax Rate (SB
1783), imposes an alternative tax rate phased down from 3.5% in TY 2021 to 2.5% in
TY 2025 on taxable income.
• Relative population share used in calculating state shared revenues in 2022-23 was based
on the 2020 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 the historical
growth rates and the estimated average of 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 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, increases in
funding for replacement of critical IT infrastructure, and money earmarked for a future time
and labor system.
• The forecast includes projected debt service for the mandated Regional Wireless Cooperative
radio replacements, replacement of the city phone system, LED streetlights and badging
systems, associated technology infrastructure, and an assumed excise tax bond sale of $150
million in FY 2022-23 for renovations of the 100 W. Washington building. The original debt of
$60 million for the acquisition of the building and Phase I improvements is scheduled to be paid
in full in FY 2021-22 using one-time resources in the General Fund.
• The contingency fund is set as 4.25% in FY 2022-23, 4.5% in FY 2023-24, 4.75% in FY
2024-25, and 5% for both FY 2025-26 and FY 2026-27 of the total General Fund operating
expenditures.
• The FY 2022-23 total compensation costs are based on projections under the current
Council- adopted pay plan ordinance and existing employee contracts.
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• 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
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 if no other funding
source is identified by the time these costs are imminent.


• Under the direction of the Mayor and City Council, staff has been exploring a potential 2023
General Obligation (GO) Bond Program that could address critical systems and other city
infrastructure. Staff plans to propose the GO Bond Program to Mayor and City Council at a
future City Council meeting. The program would require voter approval at the November 2023
general election. The forecast does not assume any increased operating cost impacts for new
facilities or capital projects from a potential GO bond program.


• The forecast reflects the continued funding of approximately $13 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. Staff continues to work 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 $25 million from FY 2022-23 to FY 2026-27, with
the majority of the funding earmarked for public safety, particularly Fire apparatus. While the
forecast shows increased funding for vehicle replacements, the citywide need is greater to
resolve the backlog of GF units over the forecast period. The Public Works Fleet Management
Division estimates the General Fund backlog of vehicle replacements to be approximately
$156M representing just over 1,800 units. In the Fire Department additional funding is needed
to replace expensive apparatus equipment including pumpers, ambulances and ladders,
which were originally purchased with voter approved General Obligation Bond funds. Of the
97 fire pumper trucks in the fleet, over 69% are either due now or will be due for replacement
in the next five years.

• The Governor’s proposed budget includes additional payments to the Arizona Department of
Revenue for replacing the outdated tax system. It is estimated that Phoenix will need to pay a
total of $8.4 million from FY 2022-23 to FY 2027-28 ($1.1 million to $1.5 million per year for six
years).



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• Beyond the potential risks and headwinds stated in the economic outlook section, the
November 2022 referendum for repealing the income tax rate reduction and the legal
challenge of Proposition 208 for the 3.5% income tax surcharge for single households with
more than $250,000 in income and married households with more than $500,000 could also
affect the revenue estimates and 5-Year Forecast. If the income tax rate reduction and
Proposition 208 become invalid, the City’s state-shared income tax revenue will be decreased
by about $29 million in FY 2023-24, although the overall income tax collections will be
increased during the forecast period. With the current situation, the income tax cut will not
affect the City’s income tax revenue until FY 2024-25 (state-shared income tax revenue is
based on actual collections from two years prior), and the urban revenue sharing (URS)
distribution increases from 15% to 18% effective in FY 2023-24. Thus, the City will receive
additional revenue in FY 2023-24 due to the increased URS distribution. However, the extra
URS distribution is to compensate cities and towns for their revenue loss due to the income
tax rate reduction. If the tax rate reduction is reversed, we assume the URS distribution will
revert to 15%, and the revenue collection for FY 2023-24 will be less than the forecasted
amount.




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ATTACHMENT C

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 also the 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, each recession
has its own features, and it is hard to predict when a recession will occur, how significant the impact
will be and for what duration. Stress testing helps estimate the potential financial shortfalls that could
result from adverse events. To help the City plan ahead, avert or limit a fiscal emergency and keep
long-term priorities on track, stress testing was done 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 D shows a hypothetical moderate recession that is estimated to start in 2025-26. 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. 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 2027-28.

Attachment E shows a hypothetical severe recession that is estimated to start in 2025-26. This
scenario assumes that General Fund revenue, except state-shared income tax, will decline by 3% for
two 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 2027-28.

Assumptions for recoveries, fund transfers and expenditures remain the same as the model shown in
Attachment A. 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.




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ATTACHMENT D
5-Year General Fund Forecast – Moderate Recession Scenario ($ Millions)
2021-22 2022-23 For Planning Purposes Only
Adopted Preliminary 2023-24 2024-25 2025-26 2026-27
Budget Budget Estimate Forecast Forecast Forecast Forecast
Resources
Local Taxes $550 $633 $659 - $668 $682 - $703 $669 - $701 $658 - $700
State Shared Revenues 496 621 673 - 683 649 - 669 643 - 673 620 - 660
Primary Property Tax 191 199 205 - 208 211 - 217 207 - 217 203 - 216
User Fees and Other 118 135 136 - 138 138 - 142 135 - 141 132 - 141
Other (Carryover Balance, Transfers, Recoveries) 197 124 49 20 24 22
Unused Contingency from Prior Year 56 57 68 76 80 85
Total Resources $1,608 $1,769 $1,790 - $1,814 $1,776 - $1,827 $1,758 - $1,836 $1,720 - $1,824
Expenditures
Operating Expenditures $1,172 $1,191 $1,283 - $1,277 $1,274 - $1,266 $1,299 - $1,289 $1,295 - $1,284
Civilian Pension 94 103 101 99 95 95
Sworn Public Safety Pension 245 260 277 289 290 292
Contingency 57 68 76 80 85 85
Pay-As-You-Go Capital (Includes Technology Plan) 25 46 40 45 45 44
Minimum Vehicles 15 25 25 25 25 25

Page 18
Total Expenditures $1,608 $1,693 $1,802 - $1,796 $1,812 - $1,804 $1,839 - $1,829 $1,836 - $1,825

PROJECTED (DEFICIT)/SURPLUS: $- $76 $(12) - $18 $(36) - $23 $(81) - $7 $(116) - $(1)

Key Resource Forecast Assumptions:
* The forecast assumes moderate 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), reduces the current Individual Income Tax (IIT) brackets to 2 starting in Tax Year (TY) 2022. The forecast also includes
the 4.5% Maximum IIT Rate: Law 2021, Chapter 411, imposes a maximum combined (regular plus Prop. 208) IIT rate of 4.5% on taxable income above $250K/$500K. The forecast also includes the
Alternative Tax Rate (SB 1783), imposes an alternative tax rate phased down from 3.5% in TY 2021 to 2.5% in TY 2025 on taxable income.
* Relative population share used in calculating state shared revenues in 2022-23 was based on the 2020 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 2023-24.

Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.25% in 2022-23, 4.5% in 2023-24, 4.75% in 2024-25, and 5% for both 2025-26 and 2026-27 of the total General Fund operating expenditures.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2022-23 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. Pension costs are based on required and projected contribution rates provided by the respective pension system actuaries and uses the Alternative Contribution Strategy for COPERS.
* Non-personnel related expenditures for 2023-24 and beyond assume expenditure growth is in line with recent historical averages.

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.



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ATTACHMENT E
5-Year General Fund Forecast – Severe Recession Scenario ($ Millions)
2021-22 2022-23 For Planning Purposes Only
Adopted Preliminary 2023-24 2024-25 2025-26 2026-27
Budget Budget Estimate Forecast Forecast Forecast Forecast
Resources
Local Taxes $550 $633 $659 - $668 $681 - $702 $654 - $686 $630 - $671
State Shared Revenues 496 621 673 - 683 649 - 669 636 - 666 606 - 646
Primary Property Tax 191 199 205 - 208 211 - 217 203 - 212 195 - 208
User Fees and Other 118 135 136 - 138 138 - 142 132 - 139 127 - 135
Other (Carryover Balance, Transfers, Recoveries) 197 124 49 20 24 22
Unused Contingency from Prior Year 56 57 68 76 80 85
Total Resources $1,608 $1,769 $1,790 - $1,814 $1,775 - $1,826 $1,729 - $1,807 $1,665 - $1,767
Expenditures
Operating Expenditures $1,172 $1,191 $1,283 - $1,277 $1,274 - $1,267 $1,297 - $1,288 $1,264 - $1,255
Civilian Pension 94 103 101 99 95 95
Sworn Public Safety Pension 245 260 277 289 290 292
Contingency 57 68 76 80 85 84 - 83
Pay-As-You-Go Capital (Includes Technology Plan) 25 46 40 45 45 44
Minimum Vehicles 15 25 25 25 25 25
Page 19 Total Expenditures $1,608 $1,693 $1,802 - $1,796 $1,812 - $1,805 $1,837 - $1,828 $1,804 - $1,794

PROJECTED (DEFICIT)/SURPLUS: $- $76 $(12) - $18 $(37) - $21 $(108) - $(21) $(139) - $(27)

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), reduces the current Individual Income Tax (IIT) brackets to 2 starting in Tax Year (TY) 2022. The forecast also includes
the 4.5% Maximum IIT Rate: Law 2021, Chapter 411, imposes a maximum combined (regular plus Prop. 208) IIT rate of 4.5% on taxable income above $250K/$500K. The forecast also includes the
Alternative Tax Rate (SB 1783), imposes an alternative tax rate phased down from 3.5% in TY 2021 to 2.5% in TY 2025 on taxable income.
* Relative population share used in calculating state shared revenues in 2022-23 was based on the 2020 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 2023-24.

Key Expenditure Forecast Assumptions:
* The contingency fund is set as 4.25% in 2022-23, 4.5% in 2023-24, 4.75% in 2024-25, and 5% for both 2025-26 and 2026-27 of the total General Fund operating expenditures.
* Includes no additional future funding for program enhancements, unfunded mandates, expiring grants, etc.
* 2022-23 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. Pension costs are based on required and projected contribution rates provided by the respective pension system actuaries and uses the Alternative Contribution Strategy for COPERS.
* Non-personnel related expenditures for 2023-24 and beyond assume expenditure growth is in line with recent historical averages.

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.


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ATTACHMENT F

The below chart illustrates the rise in General Fund (GF) pension costs for PSPRS and
COPERS. The forecast for fiscal years 2022-23 through 2026-27 is based on information from
plan actuaries and on the valuations dated June 30, 2021. Projected amounts account for
recent changes made by the PSPRS Board to lower 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 assume the employer rates are based on the Alternative
Contribution Strategy recommended by the system actuary to pay down the unfunded liability
sooner.



GF COPERS GF Fire GF Police % of Expenditures
$400 30.0%

$350

$300 25.0%

$250

MILLIONS $200 20.0%

$150

$100 15.0%

$50

$0 10.0%
16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27
Actuals Actuals Actuals Actuals Actuals Estimate Forecast Forecast Forecast Forecast Forecast




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