While I may recommend inclusion of a very small property tax for a limited purpose(s) at the end of this article, my greater purpose is to shed light on what so far appears obscured about the financial position of the City of Sedona.

First, let us get our facts straight!

Error #1: The city’s budget is and has been in deficit.

Reality is that for each of the last 6 years running, the city has added to its financial reserves, which now stand at $10.4 million, (85 percent of the city’s annual operating budget) in the General Fund.  Reserves of 50 percent of annual operating expense are considered prudent, but few Arizona cities achieve even this reserve status. Sedona is rare to have such a large General Fund Reserve. But that’s not all…the Capital Improvement fund will shortly have a reserve of $4 million, and the Wastewater Fund a reserve of $26 million. The City of Sedona has total reserves right at $40 million. So why did we just float a revenue bond of $17.9 million? One simple reason is the added flexibility it provides. If you sink a goodly portion of your reserves in the ground, they are not there for other exigencies. The interest rate on the new bonds is 4.5 percent. The investment income earned on the reserves kept with the Arizona Community Foundation is at approximately the same 4.5 percent. I would make this decision every day of the year, even if the investment income were a point or two less than the bond interest, just to spread the acquisition of a long-term asset over a long-term purchase and retain financial flexibility.

Error #2: The city has been fiscally irresponsible.

Reality again shows that the city’s Standard and Poor’s bond rating remains an “A” since 2003, the highest it has ever been in the city’s history. Irresponsibility does not occur when already high reserve proportions are added to, not subtracted from. This is evidence of conservative financial management. Further, the Government Finance Officers Association of the United States and Canada (GFOA) has awarded the ‘Certificate of Achievement for Excellence in Financial Reporting’ to the City of Sedona for its comprehensive annual financial report (CAFR). This would not occur if “smoke and mirrors” were being applied.

Error #3: The city’s debt is unconscionable and unsustainable.

By law, the city must not exceed a 1.5 to 1 ratio of revenue coverage to debt service (principle and interest). Reality shows that current city revenue coverage (including the new bonded debt of $17.9 million) is at a ratio of 2.9 to 1 (including the Capital Funds)…almost double the legal requirement and not of high current concern (particularly with the $40 million in reserves still sitting there).

So, does the city of Sedona face a budget crisis, and if so, where and why? Misconceptions abound! There are some problems, but they are not in the places and for the reasons commonly given. I’ll try to clarify a complex subject with some facts and perspective. The city’s budget includes a total of seven types of funds, some of which allow intra-fund transfers, and some don’t. Four of the seven fund types are small, for specific purposes, and are essentially self-liquidating. We do not have space to consider them here.

The three large funds we are concerned about are (with 2007/08 Budget amounts):

All of the three funds receive their revenue primarily from the city sales (3 percent) and bed taxes (additional 3 percent) and other local fees, fines and charges and interest on the reserves. In addition to the local tax and fee income, the General Fund is budgeted to receive $3,281,125 as a small “rebate” of state income, state sales and motor vehicle taxes, commonly lumped together as “State Shared Revenue.”

These state tax “rebates” to municipalities are paid only on a per capita basis (i.e., the proportion of Sedona’s population to the entire state). Just these enumerated items cover $11,115,459 of the General Fund budget. Because moneys can be (and are) transferred from fund to fund as prudence or necessity arises, what is happening to all three funds in totality is more important than an individual fund's history or projection.

This is a unique year with extremely high budget hits for necessary wastewater system improvements, sewer extensions, SR 179 enhancements, storm water projects, and a parking district contemplated (no direct outflow, but raises the raw numbers for both revenue and expenditure sides). Referring to the chart above, note the proportion of the 3 percent ($.03 on the dollar) that the city collects from the overall sales taxes of 9.725 percent in Coconino County and 9.350 percent in Yavapai County, and how it is currently allocated by the City Council to each fund.

Having got this far, what is the problem, if there is one?

Without taking additional pages of boring reading, I have concluded that the city’s General Fund is, and always has been, conservatively managed within available resources, and is not likely to require major manipulation, even considering the SR 179 impacts already dramatically accounted for (a 10 percent decline in bed and sales taxes budgeted for the next three years).

The Wastewater Fund, without major additions beyond those recently committed in the Chapel Area decision, should also be sustainable. Included in this year’s budget are $7 million in major upgrades, planned and reserved for over the previous several years.

Capital Improvements are the Problem

What is not accounted for, and cannot be dealt with utilizing only the current revenue stream is the Capital Improvements side of the house. Utilizing one-half cent of the city’s three-cent sales tax generates roughly $1.8 - 2 million annually. That is not enough to deal with Storm Drainage other than the two relatively small areas already funded, undergrounding utilities, medians on SR89A, constructed wetlands at the treatment plant, any remaining aspects of a “Heart of Sedona” project, any landscaping installation or landscaping maintenance, intra or inter-community transit, any city financial participation in affordable housing or even a city portion of an “alternate route.” Nor can any other significant capital project such as substantially increasing sidewalks, or that indoor pool, etc. ever be contemplated.

Perhaps the community is totally willing to give up forever the possibility of all of these “amenities.” That’s okay in my book as long as the community has really been given the decision. There are plenty of rural communities lacking them. But having decided we don’t want to pay for them, let’s please “tape our mouths shut” and stop talking about them.

As a community, we can easily cut off our nose to spite our face. When significant and community desired projects like storm water management and medians on 89A can’t be funded, everything else seems frivolous and unnecessary in comparison – so we do nothing. Therefore we eliminate “enhanced” lighting on two of the seven city roundabouts; we eliminate landscaping of medians on the two-mile entry to our city from the south; we forego bike lanes on 89A; we attempt to settle for the least expensive lighting solution (76 standard poles) for 89A; and we decide we can’t afford to televise city council or P&Z meetings.

Is there a solution?

There are three possible options, not all solutions.

The first was already alluded to. Namely, accept the fact that what we have now is the best that Sedona will ever be. As we attempt to cram ever more tourists into our fixed infrastructure community like the uptown business district and the two-lanes of Oak Creek Canyon, we must acknowledge that the price of our complete reliance on visitor spending is congestion. I point out that the number one issue of concern on the last three consecutive citywide random citizen surveys is vehicular congestion.

We’ll need a compounded annual growth rate in visitor spending of 6-8 percent just to keep up with the “normal” increases in city salaries, medical insurance and retirement fund (no new personnel). Compounded at only 6.5 percent for only 10 years, that puts 88 percent more tourists on our streets daily.

Today, there is approximately one tourist in town for every resident.

Expecting a tourist-driven solution to be our salvation, begs the question of how it will feel to live in a town where the residents may exist in a two to one minority?

Paul Chevalier (regular columnist for the Red Rock Review) suggested this very solution - dozens of additional festivals a year ala Telluride. Telluride is set up for it – a “walk everywhere” town, where you can have everyone park on the outskirts, and bus them all in (no autos allowed in town during festivals).

The second option is to “nibble around the edges.” I’m sure we can find a few taxes and fees to increase in order to raise an additional $300-500,000. Recent ideas have been an additional 1.5 percent Food and Beverage Tax collected from restaurants, an additional 1 percent bed tax for a total of 4 percent and an additional 1 percent construction sales tax.

Of course, goring anyone’s ox will generate a huge outcry. Additionally, this approach also nibbles at solving any significant problem. If put aside for 6-8 years, such funds might eventually pay for medians on 89A; but it would be over 30 years before we dealt with just some of the major storm water drainage problems already identified. In other words, the “pay as you go” approach can focus on one priority issue at a time, and take seemingly forever to address.

The third option is a general obligation bond passed by 50 percent +1 of the voters, for defined projects over defined time periods and paid for by a relatively minimum property tax.

The Resident vs. Tourist Conundrum

In every campaign for city council and mayor you will hear candidates take up the mantra of focusing on the residents in preference to the tourist. We all know that resounds well, and represents the true feeling of the community. Is it realistic? If you had a business with half a dozen product lines, and one of them represented over 60 percent of your sales, how much would you shift your attention and resources to the other products? If you want to stay in business at all, you darn well better focus your main resources on your overwhelming top product line. To do otherwise is irresponsible. After a few months in office, and a better understanding of how fragile the sales tax stream is to the entire financial structure of the city, do you wonder why a new city councilperson realistically revises his focus? How can one fault an intelligent councilperson for paying attention to “business?”

One can’t both argue for greater focus on businesses (primarily tourist oriented) and then decry the expenditure of uptown enhancement funding and significantly increased funding for destination marketing. As long as the residents are not significantly invested in their own community, in my opinion, they are going to realize a futile effort at having their needs come first.

Paying Our Way

When discussing Sedona’s economic and fiscal challenges during the annual Arizona League of Cities and Towns meeting, I discovered that most of the state considers Sedona to be a wealthy community. I was often required to correct the misconception. Sedona is a “financially challenged” community inhabited by a fair number of wealthy people, and I’ll say it bluntly…we don’t pay our way! What do I mean?

Per capita income in Sedona is 60 percent above the state average, but the city benefits from none of that income. (The portion of revenue sharing related to income taxes is rebated pro rata by population, not by the $ amount of the contribution.)

Median home values are roughly 50 percent above the state average, but the city benefits not a dime from that value. High value business properties like the Hyatt pay essentially nothing to the city. They remit sales taxes, but those taxes don’t come from Hyatt’s pocket…they all come from their tourist (and some local) customers. (Property taxes go to the school district, the fire district and the respective county – not the city.)

We live in arguably the “Most Beautiful Place in America” but we contribute next to nothing financially for that privilege. Oh, really? Don’t we pay sales taxes too? Well, let’s do a little math. The city portion of the entire sales tax is 3 percent from all your taxable expenditures in the city. If you as a household spent $250 every single week of the year in Sedona (exclusive of your non-taxed food and medicine), you would have spent $13,000 annually. So your annual contribution to live in Sedona at 3 percent is $490. The problem is, the average Sedona household would be extremely hard pressed to spend over $1,000 a month on taxable items in Sedona. I do not. My average is closer to $170 per week. That’s eating out once or twice a week, gas when purchased locally, two possible movie tickets, and a few odds and ends at Walgreens and Ace Hardware.

My personal contribution is therefore $265 per year. If I were average and there are roughly 6,300 households in Sedona, the total sales tax contribution of Sedona residents would be less than $1,670,000.

That’s also less than 3 percent of the city’s total budget of $60 million. If I were off by a factor of 100 percent, the result is still an inconsequential resident contribution of only 6 percent! I invite you to figure it out for yourself.

If you were to live elsewhere in Arizona, the chances are six out of ten that you would live in a community with a property tax. Based on population however, the chances are way over 90 percent that you would be paying property tax.

Of the 10 largest cities in Arizona, only Mesa does not have a property tax.

Of the smallest 10 cities in the state, only 3 do not have a property tax. You cannot evade a property tax in Prescott, Flagstaff, Clarkdale, Williams, Winslow, Holbrook, Payson, Wickenburg or Bisbee. You can’t avoid it in Scottsdale, Fountain Hills, Buckeye, Globe, Jerome or maybe even Cottonwood after mid-March. Where else would you want to live?

Let me admit in advance that this is an extremely weak argument- in fact, it’s not an argument at all, just a fact to place in your consciousness and conscience.

Because others have it is no reason…etc. I agree! It’s all a matter of what you want your community to be. You can’t expect your leaders to have much of a vision for your community if you provide them no resources to achieve any vision.

Conclusion

In October, 2001 the Morrison Institute for Public Policy at Arizona State University published an annual report called “Five Shoes Waiting to Drop on Arizona’s Future.” This report was highlighted in Sedona’s 18 month long leadership investigation, called Sedona Focused Future II, Strengthening Sedona’s Economy. The “Fifth Shoe” was identified as “The Revenue Sieve.”
“Arizona’s tax system is old and full of leaks. The challenge is clear: Ensuring the integrity of the system requires fundamental reform of a leak filled structure that has grown too reliant on sales tax.”

If Arizona’s economy is too reliant on the sales tax, what can possibly be said about Sedona’s economy?

Proposal

I do not like the idea of imposing a mandatory-additional tax burden on low and fixed income residents with all that entails. Nor do I like the aspect of impacts on commercial property owned by small “mom and pop” businesses who are barely making a living today. I would be as creative as the law allows to rebate or give credit against some or all of the property tax burden below a designated level in each of the above two categories.

There already exists in Arizona law means to ameliorate financial hardships caused by a property tax. They should be fully explored and applied.

Having stated that caveat, this would be my plan:

Start with a single week-long, citywide charrette to prioritize and set the capital investments the citizens support. Next, confirm the charrette findings with a citywide citizen preference survey.
Finally, prepare a general obligation bond election. The specific capital projects subject to the bond funding are delineated.

They cannot, by law, be changed or added to in any significant way– a new election would be required.

Once the bond amount authorized is fixed, and the interest rate established, a definitive amount of tax required per $1,000 assessed valuation, both residential and commercial is established annually to amortize the actual bonds outstanding.

Example of some rough numbers to place the concept in perspective -- say the citizens determined four projects they wanted completed in the next 10 years.

Assume the total estimated cost was $30 million. If the citizens passed this total authorization and they were all sold the first year (highly unlikely and impractical) on a 20-year bond basis, it is estimated that the annual property tax assessed to a $500,000 (full cash value) home would be approximately $265.  You can figure your own pro-ration based upon the full cash value of your home.

In reality the number would be much less for most of the years the bonds would be outstanding. The city has only so much capability to get projects designed, bid, supervised and inspected.

It is more likely that perhaps an average of $3 million per year would be drawn upon and sold over a 10 year period. In this scenario, the tax burden would ramp up over ten years to the $265 level, stay stable for 10 years, then decline annually for 10 years as the earlier issued bonds were completely amortized.

If I made you think – even if I made you angry – I’ve accomplished my goal.

Someone has to touch the 3rd rail of Sedona politics.

Such thinking doesn’t get one elected or popular, so the topic is avoided in polite company.

Reference: Sedona Finance Department Budget Reports
http://www.sedonaaz.gov/egov/sidePage.aspx?dID=1158