A detailed look at Sedona's finances

Residents hear that the City's debt has ballooned to fund capital projects like the Uptown enhancement, SR 179 construction, and upgrades to the City's wasterwater system; and that its financial position is strained.

City council candidate Cliff Hamilton recently raised a red flag saying that the City needs to plan for a downturn in the economy.

Others, like city council member Harvey Stearn, say that the size of City's debt position has been distorted in the media and that the City is adequately covering its costs. The City is in the black, not in the red.

Who's right? The answer is, both, depending on your perspective. Right now the City is, indeed, in the black and has a good quality credit rating of "A" by the national credit rating agencies.

However, the City's ability to raise additional debt backed by its 3% sales and bed tax is in question. In fact, the City is considering a new ballot initiative in November, 2008 to ask voters to approve the issuance of a general obligation bond, one backed by local property taxes, not by sales tax like the rest of its debt.

But, you say, the City doesn't assess a local property tax. It will if a GO bond is approved.

As background, in its recently released "Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2007," it says that the City divides its activities into two broad categories: Governmental Activities and Business-type Activities.

Governmental Activities include most of the City's basic services like police, public works, parks department, and general administration. Business-type activities relate primarily to the City's cost to operate, construct, and finance its wastewater treatment system. The City calls its Governmental Activities the General Fund (GF); and its Business-type activities the Wastewater Enterprise Fund (WEF).

For 2007, 53.5% of the City's revenue came from sales and bed (occupancy) taxes.

In 2007, this amount was about $15 million. Of this, about 72% represented sales tax and the remainder was bed tax (together, local taxes).

Often when a city issues debt it pledges a portion of its local taxes to support that debt.

In Sedona's case, it siphons $5.7 million of its 3% local tax to support $52 million of debt that it issued to finance its wastewater treatment system. The remainder ($9.3 million) is used for Governmental Activities. (In late 2007, the City issued an additional $17 million of debt and currently has $75 million of total outstanding debt.)

Other sources of revenue include fines and fees ($5 million - $4 million of which relates to waterwater service fees), investment earnings on cash ($2.5 million), state and federal grants ($2.5 million), and State shared revenue ($2.8 million).

State shared revenue includes allocations of state-collected income tax, sales tax, gas tax, and other taxes. For Sedona, State shared revenue comprised 10% of the City's total revenue in 2007.

Note: In 2004 and 2005, the City's local taxes were about $12.4 million. That number jumped to $14.7 million in 2006 and $15 million in 2007. What if a downturn in the economy caused local taxes to fall to their 2004/5 levels?

The biggest expense is "General government" which has increased from $4.5 million in 2003 to $7.9 million in 2007. This is followed by wastewater ($6.8 million), public safety ($3.3 million), highway and streets ($3.3 million - this expense increased $1 million vs. 2006 due primarily to the Uptown enhancement project), and other ($1 million).

Yes. In 2007, the General Fund earned $1.2 million and the Wastewater Enterprise Fund earned $4.5 million. Combined, that's $5.7 million for 2007.

Also, the City has a $10.5 million "rainy day" fund available for Governmental Activities.

Imagine how things could change if the City's local taxes fell to their 2004/5 levels of $12.4 million; a $2.6 million decline.

Couple that with the recent $17 million of new debt issued by the City since June 30, 2007 that will add at least $700,000 to the City's interest expenses, along with rising expenses and possibly additional debt in the future, and the $5.7 million buffer could get thin pretty quickly.

The City notes that the $10.5 million "rainy day" fund is in place precisely to provide an additional buffer if there is a prolonged economic downturn, or other financial disruption. So, even if the scenario above occurred, the City would have multiple layers of protection: continuing to cover its costs and the ability to dip into its "rainy day" fund until things turned around.

If the City wants to continue to fund new capital projects, a GO bond coupled with a new local property tax is one fiscally responsible solution; or an increase in the 3% sales and bed tax.

Sedona City Manager, Eric Levitt, does not entirely agree with our analysis¹. First, he notes that the City incurred non-recurring expenses related to the Uptown Enhancement project in 2007. Also, he does not expect local taxes to revert to 2004/5 levels, and says that the City's revenues continue to exceed its expenses. He goes on to say that if the City wants to maintain an aggressive capital program it will need to look toward other revenue sources, however, there remains some capacity in the City's budget to issue additional excise tax bonds.

¹Mr. Levitt did not specifically comment on this article but only to specific questions we submitted about the Comprehensive Annual Financial Report: Fiscal Year Ended June 30, 2007.

Citizen comments:

#1 While reading your recent story regarding the city of Sedona's financial situation, I noticed that the article failed to mention an alternative to raising revenue. Many people have talked about a tax on groceries. Many believe that the tax would generate much needed income and be spread out among locals and visitors alike. Cottonwood has a 2% food tax and hasn't noticed people rushing to Sedona for the savings. If your grocery bill was $100, the tax would be $2. If your grocery bill was $20, the tax would be 4 cents. The people who eat and spend more would obviously pay more, belying the argument that the tax is unfair for poorer people.

People who visit Sedona, many of them owning timeshares or camping, often hit the grocery stores for essentials. Store managers have admitted they can tell when tourists are in town based on their sales increases. Since these visitors demand Sedona's infrastructure, such as roads, lights, signs, police, water, sewerage, emergency vehicles - all paid for by locals and local businesses, they should chip in and pay. If you're gonna play, you have to pay. For years, Sedonans have footed the bill for visitors to utilize every amenity the city has to offer.

A grocery tax, with restaurants being exempted, would finally allow the city to dole out money for not-for-profit groups without the usual whining and fund programs that keep Sedona civilized.

T.S.

#2 One issue which is not being discussed by the City is the accumulating deferred expenses the City will face to repair, maintain and improve the local streets which are the City's responsibility. Many of the local paved roads are beginning to approach the end of pavement life and the repairs and reconstruction of these roads represent a a significant unfunded liability which is looming. The City should prepare a comprehensive study and develop a five year maintenance and improvement plan to address this issue. The costs and budgeting for this important City service is far more than what is being allocated in the street budget in my opinion. These costs represent a hidden expense and should be planned as part of a comprehensive long range budgeting process. Before the City considers additional expenses and taxes it should first make sure it has planned for proper street maintenance. The long term costs to address this issue must be planned for at this time and considered in relation to the larger financial plans of the City.

K.D.