Phoenix faces record deficit

Published On:
Wednesday, November 5, 2008
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Weak consumer spending and a host of negative economic factors could mean East Valley cities will be short hundreds of million dollars for the 2007-2008 fiscal year, officials said.

Phoenix is facing the worst budget deficit in the city’s history, which could be $200 to $250 million — a sizeable chunk of the city’s more than $1 billion general fund, said Budget Director Cathleen Gleason.

“The size of this deficit is really unprecedented in our history,” she said. “It’s going to be very difficult to maintain the level of services and programs that the community has come to expect.”

Every Phoenix city department will likely have funding cut, Gleason said, and parks, neighborhood services and libraries will all have less money to work with when the new budget takes effect in March. But the city is still in the process of determining the cuts, she said.

A decrease in consumer spending is a major part of the projected deficit, because the city budget is very dependent on sales taxes, Gleason said.

Jeff Kulaga, assistant city manager for Tempe, said the city has projected a deficit of between $3 million and $7 million. The city’s total budget for the year is about $370 million to $380 million dollars, he said.

Local sales tax revenues were about 8 percent less than July, August and September of last year — a large part of the budget shortfall, he said.

Phoenix and Tempe’s fiscal years run from July 1 to June 30.

Tempe, like Phoenix, will likely reduce the number of city employees, Kulaga said. About 80 percent of the city’s expenditures go toward employees in the form of wages, salaries and benefits, he said.

The city is currently looking into how to reduce the shortfall, and on Thursday the council and mayor will convene to explore different cost-cutting combinations for city services and other departments, he said.

“Tempe … is feeling the effects like everyone else, nationally and globally,” he said.

Gleason said the drop in sales taxes, which is tied to consumer spending, can be in turn attributed to falling home values.

“People were using their home equity as kind of a credit card, and they were living beyond their means,” she said. “So now that people’s houses aren’t worth more than they paid for … people are having to life with what they bring home. And so it’s really constrained consumer spending.”

When people reduce spending, they often choose to go out to restaurants less — which hurts Phoenix even more financially than other cities, because the city is one of the few Arizona cities that does not tax groceries, she said.

W. P. Carey School of Business Professor Dennis Hoffman said in an e-mail that city budget shortfalls are a nationwide trend.

“Retail sales are taxed almost everywhere and consumers are not spending at anywhere near the rate they have been,” he said.

One major reason why consumers are spending less is because of the credit crunch facing the financial system, he said.

“The crisis led to a massive erosion on consumer confidence that has resulted in a dramatic decline in spending.”

In order to ease the strain on city budgets, municipal governments should broaden the tax base, Hoffman said. Normal transactions and even food should be taxed to widen the revenue stream, he said.

“The current base is far too reliant on the purchase of big ticket items like cars and homes,” he said. “Fixing the tax code will not be easy, but times like these calls for placing more attention on this issue.”

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