Paradise Valley eyes a strategic revenue model as FY General Fund approval approaches

Paradise Valley Town Council is in the midst of reviewing its budget for the upcoming fiscal year 2019-20 as officials at Town Hall are nearing a June adoption date ahead of the July 1 fiscal year. (File photo)

As the heat inches toward triple-digits, municipalities throughout Arizona are simultaneously finalizing their budgets in preparation for adoption each summer.

The Town of Paradise Valley is working through this process — eying a June public hearing followed by an adoption of their fiscal year 2019-20 budget.

The town’s fiscal year runs June 30-July 1 each year.

On May 9, the Town Council’s agenda included three topics all applicable to their budget process: Discussion on a strategic revenue plan for fiscal year 2020; discussion on the public safety personnel retirement system; and review and discussion on the recommended budget.

The Town Council meeting was held at Town Hall, 6401 E. Lincoln Drive.

Earlier this spring, Town Council had a special meeting for all things finance, while they first discussed options for their PSPRS responsibilities in March. Town officials are now presenting four options to address PSPRS debt, with a taxable bond option intriguing the elected officials.

According to a 2019-20 recommended draft budget, the financial forecast totals $54,941,293, which is a $453,207 — or .8% — decrease from last fiscal year’s budget.

Between 2018-19 and the 2019-20 recommended budget:

  • The operating fund remained constant with a .7% increase
  • The Capital Improvements Program decreased by $1.7 million;
  • Enterprises increased by $600,000; and
  • All other funds, including debt service, increased by $400,000.

The operating fund, providing basic services such as public safety, community development and the municipal court, is scheduled to be $35,478,667 for the upcoming fiscal year.

Half of this fund is used for personnel, accounting for $18 million. While, supplies and services account for $9 million, capital outlay is $309,000, $4.5 million is transferred to the CIP and debt service and $3.2 million is used for contingencies and assignments.

As for revenue, the draft budget shows there is a slight increase for this upcoming fiscal year, with a bump in sales tax, bed tax, state-shared revenues and building permits.

Sales tax and bed tax both increased by about 1%, while state-shared revenue and building permits increased 2.8% and 2.3% respectively.

For operating uses, the 2019-20 budget decreases by about 6.4% — or $2,417,212 — for a total of $35,478,667. The 2018-19 operating uses budget was the highest it’s been since 2013, the draft budget shows.

Paradise Valley Town Hall is at 6401 E. Lincoln Drive. (File photo)

A strategic revenue plan

The strategic revenue plan discussed on May 9 stems from initiatives set forth by Mayor Jerry Bien-Willner, Paradise Valley Chief Financial Officer Douglas Allen says.

It includes an Arizona State University risk assessment and the town’s revenue analysis and annual forecast.

“There’s a lot of moving parts to this project,” Mr. Allen said. “It’s also a work in progress as there’s really not a map or standard to pull this from.”

A final document is hopefully going to be ready by the town’s June 13 scheduled public hearing on the budget, Mr. Allen said.

About 80 percent of the town’s revenue stream is produced from seven major sources, Mr. Allen says. They are:

  • Transaction privilege tax;
  • Bed tax;
  • State income tax;
  • State sales tax;
  • Highway user revenue fund;
  • Court fines; and
  • Building permits.

The 2019-20 total major revenue is estimated to be $27.7 million.

Mr. Allen says income sources such as construction and occupancy tax, compared to 2003, decreased during the Great Recession but are back to where they were more than a decade ago.

Retail tax, has increased from a 19% revenue source for Paradise Valley in 2003 to 33% in 2020.

“The major drops that you’ll find are the state-shared revenues, that’s mostly due to population base,” Mr. Allen said. “As the pie grows, so does the massive population of the state.”

Douglas Allen

Overall, the town’s revenue is well above its operating expenditures, Mr. Allen said, pointing out a line graph.

For the construction transaction privilege tax, Mr. Allen points out that as resorts finish up their projects in the coming years, the town should be aware of that revenue source evening out. The Ritz-Carlton Paradise Valley resort is in the beginning stages of construction; while Smoke Tree Resort is in the process to gain approval for a redevelopment.

Additionally, the retail and hospitality transaction privilege tax is the revenue town officials will be watching the closest, Mr. Allen says.

“Because of how dynamic it’s been since 2011, to current day, and what we see it doing in the future as more retail amenities are available,” he said.

The Arizona Transaction Privilege Tax, as defined by the Arizona Department of Revenue, is a tax on a vendor for the privilege of doing business in the state. Various business activities are subject to transaction privilege tax and must be licensed.

Paradise Valley Town Councilmember Ellen Andeen. (Independent Newsmedia/Arianna Grainey)

The options on the table

Paradise Valley’s Public Safety Retirement Pension System — also known as PSPRS — is a major part of budget discussions, as officials look at the best way to pay down money owed to the system.

In March, Mr. Allen presented the option of utilizing taxable bonds as payment for portions of their unfunded liability in the Public Safety Pension Retirement System.

During the May 9 meeting, four options were presented for applying a contemplated $12 million cash surplus to repay the pension unfunded accrued actual liability for fiscal year 2019-20, or fund the CIP.

Municipalities throughout the country have historically provided pensions to their public safety personnel — including the Town of Paradise Valley.

Pensions were meant to attract quality workers and the promise to provide that pension when a worker retired served to reward employees for years of service to the public.

In 2016, the Independent reported:

  • The Town of Paradise Valley had, at the time, 33 retired police officers collecting a pension totaling, on average, about $45,000 annually. However, there are only 23 active members contributing to the pension plan along with taxpayer dollars.
  • Paradise Valley, because of the PSPRS formula, is paying 62 percent of a police officer’s salary toward his or her state pension plan, which carries an estimated annual total financial obligation of about $1.5 million.

The Town Council in 2016 approved a resolution confirming that the municipality would try to pay off its then-$18 million unfunded liability in three years as opposed to its current 22-year plan.

In March, Mr. Allen said the town’s unfunded liability, according to the most recent data available, is $17.3 million.

Mr. Allen pointed out the change in total pension that has increased in recent years. The funded and unfunded accrued liability increased from $31.8 million to $36.3 million June 30, 2016 to June 30, 2018, Mr. Allen says.

At the start of this fiscal year, which started July 1, 2018 and ends June 30, the town paid $5 million, and has another $1 million appropriated to pay by the end of the year, Mr. Allen said.

In addition, town leaders have forecast to pay $6 million next year, and estimated the need for $1.7 million to finish the payment plan, based on the 2016 resolution.

Omar Daghestani, a managing director of investment services firm Stifel, told Town Council they are in a unique position.

“The broad threshold question we had initially was, you are in the really enviable position of having the cash to pay off your unfunded liability and move on, that’s a phenomenal thing to do,” Mr. Daghestani said. “So the question became, well, we could use a couple of different cash strategies to pay down the liability and be done — or, we could examine a couple of bonding choices and see what that looks like.”

The four options presented to council are:

  • Option 1 — Status quo: apply cash surplus in equal installments; $6 million to PSPRS in FY 2020 and FY 2021;
  • Option 2 — Accelerated cash payments: pay additional $3 million to PSPRS on June 30, 2019; $6 million to PSPRS in FY 2020 and $3 million to PSPRS in FY 2021;
  • Option 3 — $6 million tax-exempt CIP bonds: apply $12 million cash surplus to PSPRS on July 2, 2019; issue $6 million tax-exempt bonds for CIP; or
  • Option 4 — $12 million taxable pension bonds: issue $12 million taxable pension bonds for unfunded accrued liability; retain $12 million cash surplus for payment fund at 2.7%.

Mr. Daghestani says options 1, 2 and 3 he considers as the town’s “cash” options, while option 4 gives the town the ability to borrow on a taxable basis.

“As I see it, there’s an opportunity because this is an efficiency place not a budget play — that’s a great story, not only on a management basis but on a rating basis, on an investor basis, on a longterm basis,” he said.

Kicking the tires

At the end of the entire budget discussion, members of Town Council gave their respective two-cents on the best solutions for PSPRS options, asking what the pros and cons of the different options are.

Councilwoman Julie Pace asked what the downside of using bonds is.

Julie Pace

“You do lose the flexibility, if we’re just doing flat cash,” Mr. Allen said. “PSPRS, the investment pool, is based on what cash balance you have at that time. Where it matters when you put that cash in is for the next year’s rate calculation.”

Theoretically, if a recession occurred in the next two years, Mr. Allen says in options 1 and 2 the cash is already spent; if a recession occurs with one of the bonding options, the cash would be on-hand to navigate through that downturn thus giving the town more flexibility.

One sticking point the council has circled around this spring while discussing the bonding options for PSPRS is that only one other Arizona municipality is known to have utilized this option: Lake Havasu City.

Ms. Pace asked if there will be consequences for being the leader of this type of option.

“I think you’ll see more and more as time goes on with this now, different situations though — with PV it comes down to the expenditure limitation, how do we navigate through that? That’s rarer,” Mr. Allen said.

Jerry Bien-Willner

Mr. Bien-Willner says next time council reviews this topic, he wants to better understand the dates and process associated with these options, noting he wants to be able to explain to others how the bond option would work if council pursues that.

“If we’re exploring a strategy, my recommendation would be we really do our due-diligence. We’re in a luxurious position, we’re not making this election out of a crisis. We’re doing it to try and save,” he said.

“The risks that I see and concern me, which is outside of our control, is some kind of pension reform that benefits those who are way behind and does not help those who have paid in early. That’s something we’re all mindful of but again, we can’t control it.”

Other risks, Mr. Bien-Willner says, are being an innovator and having a bad consequence; or essentially trading debt.

“It is a huge decision that we’ll be taking on a debt obligation for the town, in addition to the one we have with PSPRS, which is going to be ongoing,” he said, noting that the council wants to feel like they’ve kicked every tire on all the options before making a decision.

News Editor Melissa Rosequist can be reached by e-mail at mrosequist@newszap.com or follow her on Twitter at www.twitter.com/Mrosequist_

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