By Tabitha Miller, Finance Director
Sedona AZ (April 9, 2015) – Like most years, the City of Sedona’s budget process started in December. To be precise, it began on December 5, 2014. The first step in the budget process is to set goals and priorities that will guide how the City allocates funds in the next fiscal year, which runs from July 1, 2015 to June 30, 2016. This is not as easy as it sounds and this process took several City Council meetings and many hours of discussion. Of course, the first question one might ask is how much money does the City have and how much can it afford to spend? The first part of that question is easy – as of February 28, 2015, the City had $44,717,946.71 in the bank held as cash or as investments that could be sold for cash.
The harder question is how much can the City afford and how should it allocate those funds? If you ask one hundred citizens how the City should use its funds, I suspect you will get a hundred different answers. Here are a few, but certainly not all of the thoughts:
- Pay off the City’s debt
- Save it as reserves for the future
- Fix all the drainage problems in the City
- Reduce traffic congestion
- Give it to community groups
- Give it back to the citizens
- Build or buy affordable housing
- Build more dog parks
- Build more children’s parks
- Invest in the arts
- Build a new police station
Even the seven elected City Council members have different answers to the question.
Paying off debt and saving for the future is what most of us fiscally conservative individuals would personally do with extra funds. While $44.7 million is a lot of money by almost any standard, it doesn’t go as far as we would like. The current City debt principal balance is $46.6 million, not including the interest, and exceeds all of the money in the City’s coffers. Unlike most of our mortgages, municipal bonds cannot be prepaid (excepting limited call options). This means that the City would also have to set aside enough money to cover the interest that exceeds earnings on conservative investments. The current interest is an additional $25 million.
Creating reserves or savings is a great idea and one that the City Council implemented years ago. A portion of the $44.7 million is designated as operating or rainy day reserves. By policy the City reserves fifty percent (50%) of the General Fund’s annual operating budget which currently equals $7.4 million. The City also reserves an average year’s debt service payments for the Wastewater Fund, plus ten percent of the operating expenses and twenty percent of the planned capital expenses for a given year. The current Wastewater Fund reserve is $6.4 million.
An additional $1.6 Million is reserved for future debt payments. This means that $15.4 million or more than a third of the cash balance is already set aside as “savings.” The question then becomes should this number be more or less? While saving is always fiscally conservative, there is an argument against cities building up big reserves. Today’s citizens and visitors fund those reserves but tomorrow’s citizens and visitors receive the city services or benefits when those funds are spent in the future.
One of the biggest challenges in deciding how to spend City money is the legal limitations on how certain funds can be spent. After subtracting the $15.4 million operating reserves, $29.3 million remains available.
However, $18.8 million of that amount is limited to specific uses or projects, leaving $10.5 million. For example, the development impact fees, collected by the City to offset the impact of development, must be spent on specific projects such as law enforcement, traffic, parks acquisition or for improvements within certain drainage basins.
Similarly, certain funds received from other governments are limited in how they can be used. The City receives funds annually from Coconino County which must be used for drainage improvements in Coconino County. Yavapai County provides funds that can only be used for drainage improvements within Yavapai County. The Highway User Revenue Funds received from the State of Arizona must be used for street maintenance and repairs. Funds associated with the Wastewater or sewer utility must be held for and invested in the utility and cannot be used for other government purposes. Similarly, grant funds received by the City almost always have specific limitations on how they can be used. All of these funds provide resources for important needs of the City and should be used to fund those impacts but often are not nearly enough to fund the projects the City needs.
Every year, City staff and the City Council grapple with how to allocate funds to meet the goals and often diverse and sometimes opposing priorities of the City. This is in addition to continuing to operate the day-to-day business of the City such as answering 911 calls, maintaining the City parks and roads, and treating City sewer.
In the end, the City Council does a little bit of each priority, never enough of some, and too of much of others.