City deficit larger than expected

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Already operating $2.6 million in the red, the city of Maricopa may witness its general fund budget deficit balloon to more than $4 million based on first quarter financial results.

When the city council passed the budget for fiscal 2011, which runs July 1, 2010 to June 30, 2011, it voted to use $2.6 million of the ciy’s reserve fund to cover a projected budget deficit. It set aside an additional $2.4 million from the fund to cover any additional revenue shortfalls or unexpected expenses.
 
Those unexpected expenses and revenue shortfalls are now becoming a reality.
 
Construction slowdown
Maricopa Finance Director Cynthia Sneed said that the city will have to contend with an additional $875,000 budget shortfall, over and above the $2.6 million in deficit spending already approved, due to an unexpected reduction in the number of single-family home permits issued.
 
The city planned the current fiscal year budget with the assumption the builders would purchase 36 permits per month for the construction of single-family homes. However, during the first quarter, the city only issued an average of 11 permits a month. Since
the end of the first quarter on Sept. 30, the monthly average has fallen further, to eight permits per month.
 
“Our permitting numbers are not where we thought they would be,” said Sneed.
 
The construction of homes brings money to the city in the form of permit fees and sales tax on newly built homes sold in the city.
 
To compensate for the shortfall, Sneed said she adjusted revenue projections for the rest of the year to reflect a monthly average of 10 permits, which resulted in the predicted
$875,000 additional deficit.
 
“I don’t know how much this is going to improve in the immediate future,” Councilmember Marvin Brown said. “We need to consider adjusting our budget expenses now. We need to be realistic.”
 
Unexpected expenses
Sneed said unexpected one-time purchases amounting to $691,207 also contributed to the larger-thanexpected city deficit. The majority of the $691,207 went to a $521,207 contract awarded to design firm Abacus to complete a design standards manual for future
city projects.
 
Sneed said she believes a portion of the city’s $20 million parks, recreation and library bond may be used to pay back some of the contract’s cost to the general fund
 
Between the projected $2.6 million deficit, reduced permit revenue and the unanticipated $691,207 expense, the city is now looking at a general fund deficit of at least $ 4.16 million, prior to any reimbursement from bond revenue.
 
Councilmember Alan Marchione, who was not elected until after the current budget was crafted, said the city must do everything possible to operate within a balanced budget.
 
“I am not opposed to cutting city employee salaries and benefit packages if necessary,” he said. Marchione added that he would like to see the city base its next budget on a projection of zero housing permits being issued until revenue is back in line with expenditures.
 
“The city was overly optimistic,” he said. “We are now going to have some tough decisions to make.”
 
In terms of potential cuts, Councilmember Diedrich said it is difficult to cut the general fund without touching people or programs. This difficulty arises because approximately two-thirds of the general budget is used to pay salaries and benefits.
 
Sneed said she has asked city department heads to find areas where they can reduce spending. She is also looking at the possibility of raising city fees to increase revenue.
 
“We should have some more information on possible cuts in place by December,” she said.
 
Additional budget woes
When creating this year’s budget, the city prudently planned for revenue declines and adjusted projected spending to reflect reductions in income. The additional deficit exists
because the drops in revenue were steeper than expected.
 
In addition to the collapse of building permit revenue, sales tax, called transaction privilege tax, also appears to be tracking at a significantly lower rate.
 
Maricopa projected $7.25 million in TPT revenue this year, 2.5 percent less than the amount collected last year. However, according to city documents, the actual first-quarter decline was 21 percent.
 
If this lower percentage continued for the entire fiscal year the city would experience a $1.4 million shortfall in TPT revenues, on top of the $4.16 million deficit it is already facing. In that case, the total deficit would be in excess of $5.5 million.
 
“I have seen a lot of budgets in my dealing with governments and it seems they are quite often over-optimistic,” Councilmember Brown said.