In my last blog $3,109,580 was identified as the shortage Glendale faces with acceptance of the Renaissance Sports and Entertainment (RSE) bid. This requires looking at the city’s overall financial health. A useful measurement is to look at the city’s General Fund “Ending Balance” (it may be called Contingency Fund or Rainy Day Fund). It will be helpful to refer to slides presented at the city council workshop of June 29, 2013. Here is the link:

http://www.glendaleaz.com/Clerk/agendasandminutes/documents/062813CoyotesandArenaMgt.pdf .

Some historical context is in order. In the early to mid 2000s Glendale’s economy, along with the rest of the nation’s, was robust. The arena had been built, Westgate was taking shape and growing, developers were buying land in the surrounding area and submitting development plans faster than they could be processed. When the national recession first took shape the city had General Fund revenues of $131,807,000 and maintained an Ending Balance of $49,338,000 (well over the city policy of 10%). All “expert” advice, at that time, projected a deep recession of 3-5 years and a slow recovery. Council had the choice of starting to make major budget cuts (including lay-offs) or using its Contingency Fund. It chose to use its Contingency Fund to avoid lay-offs and to weather the recession. Was it the correct decision? Obviously not, but “Hindsight is 20-20.” We now know that budgetary cuts should have been made then, just as municipalities all over the valley did, for cuts are cumulative and can help to alleviate the need for drastic cuts in the future. There were some budgetary cuts made at the time and employee furloughs were instituted but those strategies were not strong or deep enough and came too late to create the desired outcome. Those following the Coyotes saga no doubt recall former Mayor Scruggs complaining bitterly and saying that we were told that Glendale was different and no cuts were necessary. What was done was done but it set up the current fiscal crisis the city now faces. By the end of the decade with the national economy still in recession the previous council had learned a painful lesson and was committed to making budget cuts and began a plan to do so.

We come to the present. The city’s total General Fund revenues for Fiscal Year (FY) 14 are $161,500,000 and projected to increase by a mere $800,000 over the next 5 years (FY 18) to $162,300,000. In the intervening years there are General Fund revenue increases of nearly $18M but they are temporary increases based upon the raised sales tax due to sunset in 5 years. After the 5^th year, FY 2018, the sales tax increase sunsets and the General Fund revenue will revert to the level of FY 14. The temporary sales tax increase was designed to do one thing only. That was to provide the city some breathing room while it continued to make budget cuts of $5M a year for 5 years totaling $25M over 5 years AND rebuild its Ending Balance to a minimum of 10% of its General Fund revenues. It WAS a sound plan and a plan that allowed for a hockey lease. It is not the plan of the newly elected council for there are only scheduled cuts of $4.8M in FY15 and $9.5M in FY18 for a total of $14.3M. That is $10M shy of the amount that is needed to replenish the General Fund and will present problems when the sales tax increase disappears—unless this council decides to continue the sales tax increase ad infinitum. I suspect that is exactly what will occur despite its sunset promise included to gain citizen voter support to ratify the increase.

Now add a couple of facts.  First, the Fire Department had a structural deficit of $3.5M this Fiscal Year, FY 14. It was fixed by budget amendments passed by council 6 weeks ago and on June 28^th. It solved the problem—for this year only. Next year the Fire Department will face the same structural deficit of $3.5M with no direction given by this council as to where and how this money is to be found. Our second fact is at the June 25^th voting meeting of Council a restructured contract with Southwest Ambulance was approved. (FYI: SW’s Martin Nowakowski, its Public Affairs Director, is a friend of Norma Alvarez and Sammy Chavira and supported both in their election bids) The old contract called for 2 ambulances that were in operation 5 days a week for 9 hours a day. The new contract calls for 3 ambulances in operation 7 days a week for 24 hours a day. It results in an increase of future expense to the city, in this contract of $1M. It is possible that SW may pick up $400,000 of the million dollars but there is still an increased contract cost of $600,000 that is a new city obligation. And it may interest you to know that city personnel assisting on these ambulances are paid overtime pay by Glendale. What a sweet deal. Council was briefed and was made fully aware of the increased cost to the city. Neither example of fact has corresponding cuts in other areas. In particular, the Southwest Ambulance vote passed without a single councilmember question regarding it. These two fiscal examples demonstrate that council still refuses to recognize the serious financial condition of the city.

The city’s Ending Balance for this Fiscal Year, FY 14, is $8M and equals only 5% of the General Fund revenues — not a good position in which the city finds itself. The good news, however, is that it does grow in the next 5 years and by FY 18 is $20.3M (or 12% of General Fund Revenues).

Why is the Ending Balance or Contingency so important? First, it is a measurement that bond raters look to in order to determine a city’s creditworthiness. It’s like an individual’s FICO score. The higher it is the lower the interest rate. It serves a second purpose in that it can be drawn upon in an emergency or when unexpected expenses occur. For instance, the $120,000 paid for a search of a new City Manager and the $500,000 for the audit as well as the Beacon consultancy contract were paid from Contingency as these were new, unbudgeted expenses. Contingency can be used to cover increases in the price of gas for city vehicles and it can be used to cover unplanned increases in medical premium costs. Right now, with only $8M in reserve, the city is living on the edge.

How does acceptance of the RSE bid affect the city’s Ending Balance (Contingency Fund)? Instead of $8M in reserve this year, it drops to $5.7M or 4% of the city’s revenues. By FY 18 instead of a healthy Contingency of $20M it is only $8.6M (in other words, in 5 years, it is exactly the same as today).

How does acceptance of the RSE bid affect the city’s budget? Its revenues do not change but its expenses have increased by $9M as the city goes from paying a $6M a year management fee to a $15M a year management fee. We must factor in the “enhanced revenue streams” and in doing so the city projects a $2.3M shortage for this budget year (FY 14). I have shown a figure of $3.1M which I believe to be more realistic. However, whichever figure is used, there is a shortage that has to be covered.

If the RSE bid is accepted there are only three ways that the shortage can be covered. Some explanation is required to better understand Option #3 offered below. The city established an escrow account by borrowing money from other funds, i.e., Sanitation, Vehicle Replacement, etc. It has $20M in it – not quite the full $25M owed to the NHL for the second year of arena management. If the RSE bid is accepted the NHL has publicly stated that they will accept payment of that $25M in installments of $5M a year for 5 years. The options are:

1. The city can make further budget cuts in FY 14 by reducing service levels to residents, cutting more employees or trying to find further efficiencies
2. It can pay the shortage from the  Contingency Fund by drawing down the balance to $2 or $3M instead of the current $5.7
3. It can use the $20M reserved in its escrow account, earmarked for the second NHL payment of $25M, and bring down the reserved escrow amount by paying the NHL $5M this year and covering only this year’s shortfall of $2-3M

Imagine yourselves as a current councilmember for just a moment—not a Coyotes fan or a Ken Jones aficionado—but as someone charged with sound financial decisions for the city. Would you accept or reject RSE’s bid? If you chose to accept RSE’s bid which of the 3 options would you choose? Would you reexamine this council’s current financial plan to make strategic cuts and perhaps save Westgate and its future or would you make a leap of faith and decide that an anchor tenant is not necessary? It’s in your hands. In my next installment I will review items within the RSE contract that remain problematical for the city and could be resolved with further negotiation.