Phoenix council may delay property-tax funded projects

by Scott Wong The Arizona Republic Apr. 23, 2010 12:00 AM

Home and commercial-property values have plunged in recent years, reducing Phoenix property-tax revenue used to pay for some capital projects.

Now, city staffers are asking the City Council to consider shelving some or all of the remaining property-tax-funded projects - from a $4.7 million Ahwatukee Foothills fire station to a $1.6 million police driver's training facility - to avoid piling on the debt.

To ensure Phoenix can make its annual $150 million debt payments later this decade, the council also is mulling hiking the city's property-tax rate some time after 2012.

That would help the city avoid dipping into its general fund, a scenario that would strip funding from budget-strapped departments like police, fire, parks and libraries.

The city's property taxes comprise two levies: primary and secondary. The primary tax helps pay for general-fund services including police and fire protection, senior centers and libraries. The secondary pays for debt on infrastructure bonds.

Phoenix is the only public agency in Arizona that has a fixed combined property-tax rate. The rate, $1.82 per $100 of assessed valuation, has not changed in 14 years.

The proposal to "float" the secondary tax, a model adopted by most schools and municipalities, has pitted city staff against outspoken tax critic and Councilman Sal DiCiccio.

With a floating rate, Phoenix leaders can vote each year to move the rate up or down depending on how much money is needed to cover debt payments.

Staffers say even with an increase to the secondary tax rate, the average city residential property tax will drop in the coming years. That's because of a sharp fall in property values precipitated by the high rate of foreclosures and an oversupply of homes.

For example, in fiscal 2010-11, the average Phoenix home will be assessed at $173,000, with the average city property-tax bill at $416. With the rate floating higher the next year, the average home value is estimated at $137,000, with city property taxes pegged at just $269.

"People's property taxes will actually go down," said Assistant City Manager Ed Zuercher, who oversees the city's Budget and Research Department.

DiCiccio, however, calls that depiction "disingenuous." If the council decided to maintain the status quo with no rate increase, he said, city property-tax bills would fall even further.

"If you do nothing and keep the rate exactly what it is right now, people's property tax will be considerably lower next year," said DiCiccio, who has requested numbers from staff showing how much the average homeowner would pay if the rate stayed flat. "If you raise the rate, they will be paying more."

Council members discussed the floating-rate proposal earlier this month. They'll revisit that and other options on May 11, when they also will be presented with a list of street, storm sewer and other projects totaling $250 million that could be put on hold. A $5 million family-services center in southwest Phoenix could be delayed two years.

Other cities across the Valley are taking a hard look at delaying capital projects as well. The Tempe City Council on Thursday discussed which projects to postpone in the face of an anticipated 35 percent reduction in secondary property-tax revenue during the next three years.

DiCiccio sees the rate hike as yet another assault on the financially strapped middle class. Last week, he sent a memo to supporters and constituents blasting the city for recently raising water and sewer rates, imposing a 2 percent food tax which recently took effect, and increasing fees for small businesses.

"It's a shift of responsibility," he said. "It's expecting the public to solve our problems."

As Phoenix experienced rapid growth in the past decade, the city was able to build up a secondary-tax reserve fund. But the sharp economic downturn means that under the current tax policy, the city will not be able to pay its debt service beginning in fiscal 2017. That's because the secondary fund will be depleted, city officials said.

As of 2009, Phoenix still had $1.35 billion in general-obligation bond debt. Without adjustments to the tax policy, the city by fiscal 2017 would need to shift about $85 million in general-fund money to make its debt payments. Phoenix would have to move another $15 million the year after.

That would be devastating for residents who already are grappling with cuts to senior centers, libraries and parks, officials said.

Making additional cuts to Phoenix's operations and one of its only stable revenue sources could lower the city's positive credit rating. And shifting money from the primary fund is permanent since the state Constitution only allows the primary tax rate to be increased by up to 2 percent a year.

"It's a short-term solution that will forever impact your city," said city Budget Director Cathleen Gleason. "It will hurt you forever. It's just really short-sighted."

Phoenix council may delay property-tax funded projects