| ITEM #: 2. DATE: 12/09/2024 AI #:2345 |
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CITY COUNCIL ACTION REPORT
| SUBJECT: | REVIEW OF DEBT REFUNDING STRATEGY FOR THE FISCAL YEAR (FY) 2026 BUDGET |
| STAFF PRESENTER(S): | Jared Askelson, Finance Director |
Summary
Council will review a strategy to use one-time funds to pay off debt, freeing up ongoing sources for other uses. Staff seeks feedback on including this approach in the FY2026 budget. (Jared Askelson, Finance Director)
FISCAL IMPACT
While there is no direct fiscal impact of this item, it will guide the development of the FY2026 budget. Using one-time funds to pay down debt will result in greater availability of ongoing funds for operating purposes, while reducing one-time funds used for capital projects.
BACKGROUND AND PREVIOUS ACTIONS
On August 1, 2023, Arizona Senate Bill 1131 was signed into law removing the ability for municipalities to collect residential rental tax. This change becomes effective on January 1, 2025, with a $5.2 million annual reduction of ongoing sources of funding for the City. The adopted FY2025 budget included this reduction in ongoing funding and incorporated a temporary use of one-time funds for ongoing purposes to maintain sevices levels for the City.
STAFF ANALYSIS
The adopted FY2025 budget included the use of approximately $5 million of one-time sources to support ongoing operating activities. This was done to offset the loss of $5.2 million in ongoing revenues through state legislative action that removed local ability to collect residential rental tax. This use of one-time sources for ongoing operating activities is a temporary measure and not in compliance with the Council adopted financial policies that state: Ongoing operating costs should be supported by ongoing, stable revenue sources. In order to comply with the financial policies, steps must be taken to offset the loss of ongoing revenues.
Annual debt service payments are normally treated as an ongoing cost, as they usually extend across a twenty-year period. The City currently has approximately $10 million of annual debt service payments that are supported by ongoing sources within the General Fund. Those payments are made on four separate bond issues: 2016A, 2016B, 2017, and 2021. The Series 2021 bonds have their final bond payments in FY2027. One-time funds of $9.8 million could be dedicated to making those debt service payments in FY2026 and FY2027 freeing up $4.9 million dollars in each of those fiscal years. Additionally, Series 2016A bonds are callable in FY2027. Callable means that the principal can be paid early to extinguish the bonds. One-time funds of $27.5 million could be dedicated to call those bonds freeing up $6.2 million in FY2028 and beyond. Dedicating one-time funds in this way can free up to $6.2 million in ongoing sources for ongoing operating costs.
If a total of $37.3 million of one-time funding is dedicated towards paying down debt, it would have an impact on the Capital Improvements Program (CIP). As the FY2026 budget process is currently underway, it cannot yet be determined what this may specifically impact. Staff is requesting feedback from the City Council on incorporating this debt funding strategy into the FY2026 budget process and using the recently adopted FY2026-2028 Strategic Plan to create a balanced plan that meets the needs of the City.
Annual debt service payments are normally treated as an ongoing cost, as they usually extend across a twenty-year period. The City currently has approximately $10 million of annual debt service payments that are supported by ongoing sources within the General Fund. Those payments are made on four separate bond issues: 2016A, 2016B, 2017, and 2021. The Series 2021 bonds have their final bond payments in FY2027. One-time funds of $9.8 million could be dedicated to making those debt service payments in FY2026 and FY2027 freeing up $4.9 million dollars in each of those fiscal years. Additionally, Series 2016A bonds are callable in FY2027. Callable means that the principal can be paid early to extinguish the bonds. One-time funds of $27.5 million could be dedicated to call those bonds freeing up $6.2 million in FY2028 and beyond. Dedicating one-time funds in this way can free up to $6.2 million in ongoing sources for ongoing operating costs.
If a total of $37.3 million of one-time funding is dedicated towards paying down debt, it would have an impact on the Capital Improvements Program (CIP). As the FY2026 budget process is currently underway, it cannot yet be determined what this may specifically impact. Staff is requesting feedback from the City Council on incorporating this debt funding strategy into the FY2026 budget process and using the recently adopted FY2026-2028 Strategic Plan to create a balanced plan that meets the needs of the City.