Discussion and Possible Direction: 2020 August Election Update

Earlier this year staff reported that an election to authorize an adjustment to the City's permanent base expenditure limitation could only be done at a November election of even-numbered years. It has been determined that this type of election can be held at the August primary election. Staff wanted to notify the Council of this opportunity and share that it is our desire to place a question on the August 2020 ballot seeking authorization from the voters to increase the City's base expenditure limitation. There are statutory deadlines associated with a base expenditure limitation adjustment, the first of which occurs in March 2020. It is important for staff to begin preparing for this deadline should Council wish to move forward with the ballot question.

**A PowerPoint Presentation will be included in the Final Agenda**

The educational outreach for an expenditure limitation adjustment can be significant and the benefit to having the adjustment on the August ballot is that there are not a number of other issues that also require similar outreach.

UniSource has also requested a franchise election in August 2020 to seek voter approval for the renewal of their existing franchise agreement which is set to expire in October 2020. The renewal of the franchise agreement will allow UniSource to continue operations within the City of Flagstaff. It is also a possibility that there will need to be a Primary Election in August. The need for a Primary Election will not be known until the first part of April.

This is not a request to call the August election.  Should Council provide direction to move forward with the August election for an expenditure limitation increase, a request to call the election will happen in April 2020.

There is a financial component associated with adding a City question or Primary election to the August ballot along with the franchise question. Per state law, UniSource is responsible for the cost of conducting a franchise election, should the City need a Primary election or choose to add the expenditure limitation adjustment, the cost of the election would then be shared between the City and UniSource, this would reduce the financial impact of holding a City only election.

Expenditure limitations for cities and other governmental agencies were established by legislation in 1980. The City of Flagstaff has received 2 permanent base adjustments. One when the BBB tax was approved by the voters in 1988 and the 2nd in 2006. The alternative to Expenditure Limitation is Alternative Expenditure Control or Home Rule that requires municipalities to receive voter approval every 4 years. 

In accordance with ARS 41-1279.07(H), a city or town that exceeds its expenditure limitation without authorization will have the following amount of State income tax (urban revenue sharing monies) withheld based on the percentage of the excess expenditures:

• If the excess expenditures are less than 5 percent of the limitation, the amount withheld is equal to the excess expenditures.
• If the excess expenditures are between 5 percent and 10 percent of the limitation or are less than 5 percent of the limitation but it is at least the second consecutive instance of excess expenditures, the amount withheld is equal to 3 times the excess expenditures.
• If the excess expenditures are equal to 10 percent or more of the limitation, the amount withheld is equal to 5 times the excess expenditures or one-third of its allocation of State income tax, whichever is less.

The expenditure limitation is updated annually for inflation and population growth. The City expenditure limitation for FY2019-2020 is $162,133,141. In FY 2017-2018, the City was $19M below the limitation. However, with the increased pay-as-you-go capital improvement program and other increased programming and costs, the City budget has been consistently closer to the expenditure limitation over the past several years, and we have had to carefully consider the timing of major pay as you go capital projects. The task of assuring the City budget is below the expenditure limitation has become more difficult each year.

The last expenditure limitation was in May 2006. Voters approved a permanent base adjustment of $25M due to:

• A 49.8% increase in primary property tax collections ($1.3 M)
• A 26.4% increase in City sales tax ($2.9 M)
• A 34.1% increase in auto lieu tax ($650 K)
• An $8 M increase in transportation tax, and A 37.4% increase in pay-as-you-go capital ($13.2 M)

Since 2006 the City has adopted the following new revenues and taxes or experienced significant increases in expenditures:

• RR & SS taxes - $7M
• Parking District - $1.5M
• Stormwater - $3.6M (since FY 2005-2006)
• Water Service Rate increases $14.1M (since FY 2005-2006)
• FHA - $1.9M
• Butler/Route 66 Bridge $4.8M
• Pension cost increase $13M (since FY 2005-2006)

These increases total approximately $45.9M. City staff will analyze the impacts of these increases on the City expenditure limitation and will come back to Council in the spring with this analysis, further education on expenditure limitation and our recommendation on the permanent base adjustment.  Our preliminary estimate for the permanent base adjustment is between $20M and $35M.