City Clerk.

All right.

We don't want to start at 0731.

0730.

Vice Mayor, are you on line?

I am Mayor, thank you.

Great.

Okay.

With that, uh, we're gonna say welcome to the Mesa City Council study session for February 26, 2026.

Oh, that's a good one.

Uh Vice Mayor Summers is participating by Zoom, otherwise, all city council members are present.

Uh today we're gonna hear item one A, a presentation on the fiscal year 2026-27 general, governmental and utility fund principles, priorities, and forecasts.

Brian and Chris.

It's your show.

Good morning, Mayor.

Thank you.

Mayor and Council.

Uh we will be this morning pretty uh kind of kicking off the uh fiscal year 26-27 budget process with the city council with an overview of our financial forecast uh for the five um five years.

And so with me is um Chris Olby, who is also a deputy director with the OMB, and he will be helping out with the presentation.

So first I wanted to start off with the homeowners comparison.

I know we've we've seen this before, but just want to kind of reiterate that even with the uh the with the budget that we have and the forecast that we see, uh Mesa is uh still the uh third um most affordable city within the valley that we compare to.

And so we have been there for the past um several years, and we continue to be right there, right in one of the most affordable um cities.

And so what I wanted to kind of go through too is just to remind council of what is included in the homeowner comparison.

So what we try to do is take what a homeowner in Mesa Um, what they spend, what their costs are, and if they went to a different municipality, what would that cost be comparable to?

So what we include is pro the property tax, so the primary and secondary property tax.

So as mentioned, Mesa does not have a primary property tax, but we do have a secondary property tax.

What also is included is the city sales tax um calculated by applying each city sales tax rate to um some statistics, and what we look at is kind of what is uh an average household in the city of Mesa, which is about 2.1, 2.5.

And so we take the sales tax and calculate it that way.

And then also we take the three major utilities solid waste, water, and wastewater.

And what we do is we combine those to come up with the um our homeowner comparison.

And if you go back to the previous slide, that's where those different green, the different colored um bars are is so as mentioned, Mesa does not have a primary property tax, but you see, most of the the other uh municipalities do have a primary property tax.

Then we got the secondary property tax, the city sales tax, solid waste, water, and wastewater.

So we take all those, combine it and see how we compare to our neighboring municipalities uh in the valley, uh, and also Tucson to see if you wanted to pick up from Mesa and move to a different uh municipality.

This is how we would compare.

So moving on to the financial forecast, uh, just a general overview.

Um we forecast for five years, and so what we do is we take the current expenditures and expenses and revenues along with historical trends, but what we also use is a um software and um data from U of A.

It's uh the forecast project out of U of A, and we take that data, but then also we we take a look at the city of Mesa's data, so we drill down into our own data and put it into the uh software and then go ahead and um forecast that.

We are conservative.

Um wanted to kind of highlight that a conservative multi-year forecasting approach, which allows the evaluation of sustainability of programs and services.

So what that does is what we're able to do is when we show you a five-year forecast, we're also going out a little bit farther.

But what that does is so and we're able to look at the forecast to see is there any expenses, revenues, things like that that we need to um plan for to where we're not making a judgment in one year the next year, but then the next year after that, then we have to make a different type of judgment.

So if we had a revenue loss and then we we have to cut services, but what happens if that next year that revenue comes back or we have an increase, are we gonna add service?

So what we try to do is forecast out so we can plan how that forecast will look in the future and be able to sustain our services over the long over the long period.

So going into the revenue forecast, as I mentioned, we use some statistical software applied in-house, but then we also collaborate with the departments, such as the utilities development services to see how the permit revenues are coming in, and other um other departments to for their fees and charges also.

Some of the relevant indicators is population, account growth, wages, unemployment, building permits, uh, gas prices, and other economic indicators that we put into the software to come up with what our revenue may uh forecast would be.

And then we also, as I mentioned, we use specific factors applied for just Mesa itself.

On expenditure forecasting, we do the same.

However, we also take personal services as we as we know personal services has been a topic in the past couple of years and has been uh increasing.

Uh also other services and commodities, and I'll go into a little more detail on some of those of increases in those uh line items.

Um utility expenses have gone up, um, water commodity purchases have uh increased as we've talked about previously, uh, and also chemicals and tipping fees.

So, but also the capital, the major projects have increased uh over the past few years, and we're not seeing prices come down, it's just adding on to the inflation that we have.

So we're seeing and even vehicle purchases have increased.

The average uh new car increase um has been significant over the past couple of years, also.

So moving into the general governmental funds, just a reminder the general governmental funds include the general fund and also the uh quality of life fund and the quality of life fund primarily uh funds the police officers and firefighters back in I believe it was uh the early late 2000s, late 90, late 90s, early 2000s, the city passed a quality of life uh uh sales tax that was dedicated for 120 police officers and 65 firefighters, and that's what it primarily goes towards.

And so, with that, what I wanted to show here was um council adopted um a few few years ago uh the city's financial policies.

And what I wanted to do here is I know we've been presenting for the past couple of years the our financial principles and wanted to kind of correlate our policies to our principles.

And the way the the city looks at our policies is the policies is what um is kind of our floor, our base.

What are what is that what we're looking for?

And so with the state, we have to do an adopted balanced budget.

And adopted balanced budget is when your expenses match your resources.

And when I say resources, that's your revenues along with your fund balance, which is the city's um savings account.

So if those match, you have a balanced budget, and that is required by state law that we do that.

Uh our policy also mentions that we have an 8 to 10% reserve balance.

Uh going back to our financial principles, the correlation for a balanced budget is a balanced net sources and uses.

So with that, a balanced net sources and uses is basically what we're striving for is to be structurally balanced when your ongoing revenues and your uh ongoing expenses match together, and you don't have to use your savings account.

Then with the um what we strive for on our principles for our fund balance reserve over the five-year forecast is a 10 to 15 percent uh fund balance reserve, and that's throughout the forecast.

So, what we take a look at is on that fifth year, where do we sit with our fund balance and our fund balance percentage?

And so our principles are 10 to 15 percent.

Now, going back to the policies of the forecast period, we do require a multi-year period, and so what that helps is on our principles is the sustainability of programs and services.

So once we're able to forecast out those five years, we can see are we able to sustain our services?

So, for instance, when we build a fire um fire station, we can go ahead and build the fire station, but do we have the revenues to be able to sustain those services for the operations and maintenance of that uh fire station?

And same with a park or um any other programs that we set up, are we able to sustain those services without having to go and cut those after two years because the revenues aren't coming in?

Then also with fees and charges that we bring in that helps with the wages and benefits of the of the staff of the city, and then adopting a five-year capital improvement program is one of our policies for the principal is we want to invest in our capital and life cycle uh replacement projects.

So with looking at that, um I want to go over some current outlook of our revenue pressures.

And as we've we've known for a little while, um the loss of residential rental happened last January, and so on January of 25, uh the city was not able to receive residential rental anymore.

So that has an 18 million dollar annual impact, which began last fiscal year, and we're still seeing the effects uh this fiscal year.

Also, the implementation of the state flat tax.

So it was rough around estimated a six million dollar annual impact, which began last fiscal year also.

So we've saw those revenues um reduced.

The other pressure is the state is seeing a very flat growth in sales tax.

Right now, they're at a 0.4% projected annual growth for 2526 above last fiscal year.

So that's pretty flat.

And I and so we're also seeing the same thing as a city.

Um the past three fiscal years, our sales tax revenue has been flat.

So in fiscal year 23, we came in with about 330 million dollars.

Fiscal year 204, we came in with um 329 million dollars.

Fiscal year 25, we came into 331 million dollars.

So even though we're seeing some, it looks like we're doing really good month over month, our at our sales tax as a whole for the fiscal year has come in flat for the last three fiscal years.

So what happens is if we're flat, but our expenditures still increase, we have some pressures there that we need to be able to um adjust for.

And then also a reduction in our state shared revenues um with the incorporation of Santan Valley.

So how that works is state shared revenues is our um state shared sales tax, also our income tax, and which they call urban revenue sharing, and also our vehicle license tax.

So what happens is there's a a pie that everyone shares from.

Well, when you add someone else in there, the piece of your pie gets reduced.

And with that, we went from 91 city, 91 cities sharing that pie to 92 municipalities now sharing that pie.

So we have a reduction in our ongoing revenues of three million dollars starting this fiscal year currently that we're in.

Also, uh reduction is the uh tax conformity.

So the state um on an annual basis conforms with the federal tax code.

And so with the passing of federal HR one uh with the tax reductions and that those things, the state is looking at um conformity with that.

And if they do the whole uh conform with all of HR one, we will see an estimated six million dollar annual impact starting in 27-28.

And so they're still negotiating on what they're gonna put into that tax conformity, it could be a little less, but we want to put in there if they did the whole thing, the six million dollars is what we would be looking at a reduction two years from now.

Because just a reminder that income tax is collected right now for um individuals and corporations, however, the state does not distribute that uh to the towns and cities until two years later.

So I wanted to kind of show you with some of those pressures, inflation growth.

And so what I want to concentrate on is is the right-hand side of the chart, and as you see, kind of that big spike was um just right after COVID, so in 21, and then it it spikes up just in 22, almost in 23, but then it starts coming down.

But what happened with that?

So, as you see in December of 25, which was just this last December, prices have increased almost 25% above prices in 2020 levels.

And what we have seen is that a majority of the prices we have done is or we have seen in purchasing contracts, purchasing commodities, things like that is the prices just because inflation has lowered, prices have not lowered.

Prices have stayed, and then inflation just builds upon those prices.

And so that's the expense pressures that we are looking at right now.

And of course on expense.

Yes, of course.

Quick question.

So explain to me.

So uh inflation is is up 24%.

So why is why are why is our sales tax flat, right?

Because presumably we'd be collecting more tax on higher prices.

So can you explain that to me?

So, yes, mayor, council member um go forth.

I could I can guess on how that works.

The the way I've it looks is that there could be with the prices increasing, people are now really looking at what are they buying, and maybe they're being a little more frugal, maybe they're doing in the cheaper brands, but still buying the same.

And maybe they're being a little more frugal, maybe they're doing in the cheaper brands, but still buying the same.

And so with those prices increasing, they're not buying as much, so we are flat.

So if you increase the price but buy less, we're still gonna get that same revenue.

So that could be happening.

I don't know.

It it we would have to see.

Um we don't have the detail of what everybody is buying.

Uh, but we can I can kind of guess of that with the prices increasing, people are not buying as much.

So with that, it's still staying stable across the board.

Mr.

Adams.

So I I just want to make sure I understand Mr.

Richel.

Um, so we're not seeing that just specifically to Mesa, that's statewide.

Is that right?

The uh decline in sales tax revenue.

It's pretty much a statewide thing you're thinking.

Mayor, council member Adams, that is correct.

So, as mentioned, we are seeing a flat growth with the state also of sales tax and and our revenues that we're getting from there.

We're seeing flat growth also.

So this isn't the case of people are going somewhere else to buy whatever it is, it's just across the board.

That's correct.

Thank you.

And and remember, Mayor and Council, we're we're talking about all sales tax.

I mean, as Brian said, retail has been pretty resilient over overall, and you you see that people are still shopping, people are going out to restaurants.

Um, you know, people are people are doing that.

It's just with different tax changes that have happened at the state, and then also the elimination of taxing sources like uh the residential rental, that when he says we've we've lost that, we we would not be flat had not some of those changes been made at the state level.

So I know when we say sales tax, we uh we all immediately just jump to retail, but this we're talking about all sources there.

So that's why we've have this dichotomy of people are still spending, people are still out shopping and spending in our community, and that's um we we see that in the retail category.

Um but that's it's when you make other tax changes that impact other sales tax collection, that's where we're seeing it flatten out both for the state and for municipalities.

That's the thing.

Thanks for clarifying.

Yeah, that's yeah, as I'm I'm wondering, is somebody beating the socks office in retail sales?

Okay, thank you for clarifying that.

But yeah, mayor and counsel to um the city manager's point, we are seeing um good growth in retail, we're seeing it in utilities, we're seeing it in other categories, um, which is helping to keep us flat.

If if it wasn't you'd be for that, yeah, if it wasn't, we would be dropping because of the loss of residential rental.

But if we had residential rental on top of that, yes, we'd be growing at a significant amount right now.

Ms.

Taylor.

Uh can I just add for public observance?

One for people who are thinking when we say inflation is really high, I just want to note this is cumulative inflation.

Um, just reading my notes here, that this is not annual inflation.

So CPI might be about 2.4%, but those past cumulative prices didn't go away.

So things like you know um insurance costs, medical expenses, uh, infrastructure costs, just so everyone understands that's where we're talking about it.

And also, I'd like to also publicly comment that we did not get the removal of the tax exemption on our data centers, and Mesa doesn't have a food tax, so those are other sources where we are not generating revenue.

So do you want to hear some more to that?

And there's bills pending in the legislature that may still even hamper sales tax revenue collection for municipalities.

That can hurt us even more.

Yeah, mayor, you're you're gonna see a common theme as we dive into the numbers a little bit more.

That if not for changes that were outside of our control, we wouldn't be talking about the situation that we've found ourselves in the last couple of years.

This was not um overspending on the city's part.

This was not um bad financial forecasting on the city's part.

This was the culmination, as Brian alluded to, of all these different things happening at the same time.

And I know in my years here, I mean, we see tax changes, we see we see um, you know, a new city incorporate, but all of that usually doesn't all happen at the same time, along with the highest inflation in uh, you know, in probably our lifetimes that that we're going to see.

And so it really has been the perfect storm uh the last um the last few years.

But there's some silver lining, and we're getting to that.

I know it seems like you know, it's all dark and stormy right now as we're talking about that, but because of that conservative fiscal management that Brian alluded to, um, we're we're gonna get to some some some better news here in in just a few slides.

Well, I just gonna share going back to that slide on inflation.

I've read a lot of cardiology strips in my career in Souls of Ice Mayor, and this looks like V fib, and we're almost going to flat line right here.

And then we're gonna put uh defibrillator on it to help pump it up.

So yes, Mayor, we still have some bumps in there, so we're still V fib uh strip here on the cardio on a 12 lead.

So it gave me flashbacks, there.

What am I looking at?

So all right, continue on.

Sorry.

No, I thank you, Mayor, Council.

Um current outlook for expenditure dispendure pressures.

This is some of the categories I was mentioning, contracts and services, for instance, landscaping custodial maintenance.

Uh, we have definitely seen an increase in our fleet maintenance and repair for third-party um labor costs, parts and fuel.

Also market-driven compensation and competitive benefits, um, those have increased over the past few years.

Software and licensing, we are definitely seeing an increase, and and some of that is contributed to a lot of the software companies are having us go to the cloud now, which is a little more expensive, and on an annual basis, it becomes more expensive because now we do an annual subscription instead of waiting five, 10 years to upgrade.

Now it's on a continual basis.

And then also um we have the continuing ARPA initiative.

So the some of the initiatives that the city has um set up during uh with the ARPA funding, now um we have it with the ongoing general fund support, such as the real-time crime center, um city Wi-Fi, uh, the homeless support, and some of the behavioral health uh programs.

So putting some numbers to those categories, as I mentioned, um, for the general governmental fund, fleet and repair.

So 90% of the costs are uh PD and fire, which they have some of the bigger the fleets.

Um we've seen a 51% increase over the past four years.

Um the software licensing, as I mentioned, we've seen over 135% for PD and fire.

Um landscaping services, 55%, and then also custodial is 64%.

And then when we mentioned about the citywide impacts also is uh medical and dental, we've seen significant increases in the medical and dental.

Um it's up almost 40 percent over the past four years, and we see a significant increase coming up this year in the following years.

Ryan questions.

I just want to make sure I understand.

So 90% of the fleet cost is PD and fire.

That is correct.

For the general governmental fund, that is correct, yes.

And especially the complexity of those vehicles as well.

And you're not talking about just you know, a light duty truck of fixing a Ford F-150, not that there's not complexity in that, but when you start talking about the types of vehicles that are maintained um from police and fire, that adds to the complexity and the cost that's associated with with servicing that fleet.

Yeah, mayor and council, those those are as we know, those vehicles are run almost 24-7 because they share the vehicles on different shifts and things like that.

So they do um cost a little bit more to maintain.

So to put a graph to our total uh sources and uses for the general governmental fund for our current forecast, is as you see in 24-25, um, we have the actuals, our revenues came in slightly above our um expenditures.

We are forecasting uh some increase in our expenditures and some dips in our um in the revenues.

However, we'll see that for the next uh few years.

Um, but we do look to become structurally balanced where our revenues and our expenses uh come in at uh in 2930 as structurally balanced.

So that's where we're looking to grow out where our revenues will um surpass our expenditures.

And as you see the blue line with our uh reserve balance percentage, it starts dipping, uh, but then it also then it starts um we're consistently about 20, 21 percent out in the um future.

And so just to remind council that our principal is 10 to 15, but right now we're looking at about 20 percent.

And so if we go to the next slide, what I want to what I wanted to show here was this is the forecast uh that we had when we adopted the budget for 25-26 last June.

And so what I want to highlight here is our net sources and uses, how we were negative all the way throughout the forecast.

And we we tried to um I know we tried with um with the reductions, but then also we saw significant increases in personnel costs.

We're looking to try to get structurally balanced, however, with some of those pressures, we weren't able to in it.

So the uh structurally balance goes outside of our forecast.

And you see the ending balance starts dipping into our reserves, and by the end of the forecast, we're at 9.2%.

Yes, we're within our um uh in our policy, but we would like to be in between 10 and 15 for our um for our principles.

So what we did now is with the um with the departments looking at it, and also we revised some of our um revenue estimates and looking at the another um two percent reduction for right now.

Um we're looking much better to where now our net sources and uses are structurally balanced within as I shown on the graph, 2930, and then starting to grow out of that.

And as you see our reserve balance, um we we drop to about 21 percent, but then start growing out of it.

So right now, the uh we have moved up our uh structurally balanced from outside of our forecast to um inside our forecast.

And so a couple of things I want to um mention here though, too, is that this is what the forecast we have right now.

We are still going through our budget process, and so there will be um some adjustments to this forecast depending on um programs and reductions and things like that.

So that 2.3 per that 2.3 uh million dollars in 2930 could fluctuate up or down depending on on how the uh how the budget process goes.

There's still some um decisions that need to be um made by city management and council on that budget process.

So um but this does include the um the full two percent um reduction.

So we wanted to put that in there to see, okay, if we took all of the two percent of all of the departments, um, which is roughly just over 10 million dollars, what would our forecast look like, knowing that we still we'll still be making adjustments um pending um city manager approval.

So mayor and council again, um big deal though.

We were able to uh thanks to the work of council and staff, two full fiscal years now we've moved up that structural uh rebalancing uh that that council had asked for last year.

Um what we heard you loud and clear that we wanted to see more aggressive approach to get back to that to being structurally uh balanced sooner than what was in our forecast.

And so to do that two fiscal years uh sooner is a big deal considering all those pressures that we just talked about, because some of those were come were compounded, you know, since since the time that we adopted the budget, um we talk about tax conformity with the federal uh HR1.

That that was not uh last year, and that's six million that we we have in.

So even in spite of um even new challenges laid on top of us since um council adopted the budget last year, we've been able to make such a dramatic uh approval uh improvement on this.

So, you know, we're not out of the woods yet.

We have a lot of challenges, but the trajectory is really strong, and that and that's the point that I really want to stress this morning because um we heard your challenge to accelerate that and um OMB and and just the the ability to manage um show that fiscal restraint from the departments, the two percent cuts that folks have done, which is is never a fun exercise, but it's really helped us to be able to tighten our belts and to find efficiencies and to and to work through this.

So that's a pretty dramatic swing.

And as Ryan said, that that number, you know, two and a half um two point three million uh in the positive, that could fluctuate a little bit, but the bottom line is it's basically flat at that point, you know, whether it's uh a million, a million below or a couple of million above.

I mean, we're basically back to flat, and then we uh continue uh that positive trend as you see um moving forward where where that only grows.

Most importantly, too, I think it shows that change in the percentage.

I know Brian's highlighted or or um, but when you see our fund balance not drop below 21 percent, remember the council policy is eight to ten.

Uh our goal is ten to fifteen, and we don't drop below twenty-one percent during this during this time, and so um under the new forecast.

So that's really positive too, because we've been able to stabilize our savings, and then we maintain very robust savings.

I mean, again, we we've had this because we were conservative and we didn't spend some of those one-time um revenues when uh post-COVID when sales tax and other things just kind of went through the the roof and spending consumer spending, we sock that away into into our rainy day fund.

It started raining, we're using it, but we're still at the end of the day maintaining some of the highest reserve balances in the city's history um by the by the time we work our way through this.

So that's a real testament to the work that our staff has done to ensure that we are still extremely financially sound uh at the end of this.

All right, thank you, Miss Duff, and then Ms.

Gulf and Mr.

Redia.

I know it's early and we don't know what legislation is gonna do, the state legislation.

Are we running any scenarios if we're not able to take any increases in our in our sources?

Mayor, council member, um we did we did build in total uh conformity.

Correct me if I'm wrong, Brian.

So, you know, the governor and the legislature right now are are debating which portions of tax conformity um with HR one that were going to be implemented in the state.

We took the worst case scenario and and cooked that into uh what you're seeing today.

So even if we went with total tax conformity, um, which is what the governor has vetoed now twice, um we we have that baked in.

And so if they do less, well that helps our that that improves our situation.

We'll get to it in a little probably one of the the bigger challenges we'll we'll have from some legislative intent would be on the utility side of of the equation and not on the uh general governmental side, and we'll and we'll get to that in in just a few minutes and and can speak to that, Councilmember Duff.

Yeah, and so we're not really looking at the pending legislation until it passes.

Oh, we are.

Um I I certainly don't want to leave you with that impression.

Uh Miranda and and and Kathy have been keeping us informed as as anything um comes down the pike that could influence um our revenue.

Primarily the biggest concern has been some of the bills that have been alluded to that deal with our ability to to manage our utility um and how um and how fees and charges are assessed um on the utility side.

So that we'll discuss that on the on the on the utility fund side.

But on the general governmental side, really the biggest unknown by and large, and there's other bills out there.

I don't want to tell you that there's something that won't have an impact on on us, but really the biggest financial uncertainty rests with the tax conformity, and that's so we wanted to take the worst case scenario and bake that in and uh and go from there.

And if it's if it improves our standing, well, that's great.

That only helps us.

Okay, second question is on um the previous slide on the general governmental funds on the um total uses on year 2627.

There's a dip, and then it goes back up in 2728.

Is that the fork the cuts that were projecting for this year on the 2627?

So yes.

Um 737 to 718 and then up to 742.

Okay.

On the total uses.

Yeah, I'm looking.

I've I've got that here, 2062.

So, yes, um Mayor, um, council member Duff.

What that also is is what we have is the carryover.

Um, and the biggest portion of that is carrying over the expenses we don't have.

So, what is projected in 2526?

Um, we have about 26 million dollars in carryover, and what is gonna happen with that, that's gonna move over to the following year.

And so right now it looks low, but when we carry that over, it'll become a little higher.

So that's where um some of the the budgeting is to where we have contracts that or purchases that we um have budgeted for, but we haven't paid for yet.

And so what happens is that we just carry that capacity over until we then go ahead and um pay for those.

That that was one of the and and um mayor um that went to council member go forth's question when we were in the strategic planning session uh last last week.

That's that's one of the hardest concepts to kind of illustrate here within when in the budget because we have a lot of one time already budgeted and accounted for funds that naturally roll over um because of like we said, maybe the expenditure doesn't happen, a delay in construction.

You think of you know, like we're we ran into some delays on a fire station, and you know, you have to you have to carry money over even though you had plan maybe to start construction on a certain year.

So you have um these these various expenditures that we have to carry over as one-time expenses, which which is uh sometimes hard to uh excuse the numbers uh and and even though those are one-time carryovers.

And we've been talking about Brian and and his team are going to um uh look at some different ways that we can illustrate that, you know, moving forward, because I think it would be helpful both for the council and for the public to to understand that dynamic that goes in into the budget because that accounts for some of the um some of those different numbers, yeah, structural numbers that you were asking about, Councilmember Goforth last week.

So we're we're gonna look and see how we can illustrate that.

It it gets really complicated and dense.

But we're we're trying to find a way to to simplify that and be able to tell that story.

Yeah, I think that would be helpful to the public to be able to pull that out and and talk about it, yeah, and explain it how it works.

But as you say, it's getting into accounting weeds, and that's difficult.

So, yeah, mayor and council.

Uh one of the other things too is that in the projected 2526 is the um PD radios, which is 9.5 million dollars.

So we have that expense as part of the 737 million, but then we don't have that expense in the following year, so that's why it dips down there too.

Those are one of those one time as well.

Those one-time expenses that may hit, but then we don't have it the following year, so that's why it looks like it drops so significantly.

Yeah.

And that's part of telling that story, Mayor and Council is um and and we've done it in the past in in certain ways, and it it got complicated, but still pulling out those those large one-time expenses that we've already accounted for that we knew were coming, they were lifecycle replacements, like in the case of of these radios.

But you know, you when you have a few million dollars, you know, dedicated to one particular project.

And we and we have several of those, you know, obviously in a budget of of our of our size and scale.

So pulling some of those out and highlighting those um would be would be important too as we move forward.

And I think there's this I I think based on our polling, there's a lot of trust of our residents in what we do, and they don't have to see you know, maybe all of those explanations, but there's a there's a group of people that it it's just not there, and that they would like to see that.

Um I think that trust is built on years and years of financial stability and watching the city um uh maintain a strong um financial position, you know.

Um but there are there are some new residents that you know don't have that history and maybe need a little bit more explanation as to why some of these things happen, which I think is absolutely fair and reasonable.

Um I know so our sources are flat for a couple years and then they start to rise again.

Can you explain so that's what we were looking?

Um the reason for that is what I mentioned previously with ours with our sales tax being flat for the past few years.

Yeah, we're looking, we're seeing um forecasting that we're still be flat and want to see how that growth goes, and then we'll see.

Hopefully, we start seeing our normal three to five percent increase um growing out of that once we see um prices stabilize on how the tariffs are and thing and how things go like that, to where we'll start growing out of that on the sales tax side and the income tax side.

Interesting.

So it's assumed that prices stabilize.

Yes, once it once the prices stabilize, then we'll start hopefully seeing that growth and seeing the impact of any of those prices.

But as I mentioned, we can uh I could show you if you want to go to that.

Uh but uh but but I mean take out you know the the all the categories.

I mean, as you said, retail spending has continued to increase.

Right?

If you pulled spending out, or it has.

I think if you went back, uh mayor and council um and you looked at a 60-year um, you know, growth curve on this, you you would see that that constant inflationary growth, you know, as things get more expensive, naturally get more expensive than it costs more, and so the sales tax generated by that is more.

We have new residents move into the city, we have new shopping come online.

All of those things lead to that normal inflationary growth.

What happened was with all of these changes happening at the same time, it was a shock to the system.

Uh the mayor used a great great medical uh imagery on that to show it, but that's really what it was.

And so normally so now the patient is stabilizing, and then the patient's gonna get better.

And uh, and that's that's what Brian and and and Chris and the team look at is um after this kind of shock to the system, we've stabilized, and then it'll be normal inflationary growth in revenue that we s that we historically see.

So, for instance, mayor and council member go forth for fiscal year 27-28, as I mentioned, that's where the six million dollars of conformity where we would lose six million dollars.

So if we had the six million dollars in there, we would be at 721 million.

So we would have a a nice growth going from 700 to 721 to 745.

But with that tax conformity, we have that in there to where that's where our reduced.

So it does look like we're kind of flat um for our total sources, uh, and then we start growing out of it.

We just need more stints.

So with that.

Did you ask all your questions?

No, I have one more.

So uh can you read a reiterate, Scott, the reasons that we we that the current forecast is looking more favorable than the the adopted budget.

million so we would have a a nice growth going from 700 to 721 to 745 but with that tax conformity we have that in there to where that's where our reduced so it does look like we're kind of flat um for our total sources uh and then then we start growing out of it we just need more stints so with that did you ask all your questions no I have one more so uh can you read a reiterate Scott the reasons that we we that the current forecast is looking more favorable than the the adopted budget you say maybe um we we that two percent cut right we are maybe maybe a little bit more sources than we anticipated things like that we haven't changed necessarily changed our conservative forecasting philosophy not at all that nothing has changed in that regard in fact that's our savior at the end of the day because we fully load all costs right we we budget as if every position is filled 365 days a year at the highest you know level and then and then we back down from that as we have vacancy vacancies and personnel savings we don't we we have revenue that has come in higher on the retail side because it has stayed robust so our our um so we've accumulated more than we projected on in retail sales and so when you when you factor in all those different things that we do of expecting the worst in revenue and then expecting the most in spending and and we um are conservative on our spending and we've had uh more robust revenue than beyond our very conservative estimates then that has accounted for the growth that you see um that that's reflected in the new um in in the new forecast.

So I assume we're gonna be having discussions about the that the two percent and what you know is the result in what maybe services or programs are to be cut.

Yep so mayor and council when we get to the end I'll we'll do a I'll show you the calendar and the kind of the schedule and when we come back when I come back with the city manager's proposed budget and the departments then have theirs that's when our discussions will um begin to start with okay what programs and which things do we want to continue or not continue and and stuff like that is in the so in in the last year or so it's been you know this is a different discussion but just laying the groundwork it's been here's a two percent cut but here's a you know but we're actually gonna increase our budget by you know right certain amount so hopefully we'll get a little bit more clearer on when we say two percent cut that doesn't mean your budget actually goes up right we okay yeah exactly and what I I think what you're also seeing I mean we we embed in personnel cost and and because we we've got to stay competitive right so we when so when we look at these forecasts um we're not we're not taking that two percent cut then to on the backs of our you know employees on their wages and other things like that because as we've seen on the public safety side in particular that's where we've definitely had had to stay competitive.

What we needed to do though what the two percents really represented was this ability to tighten our belt and slow the growth to allow that natural uh development of of um inflationary income to catch up with what we lost and so it it just put the brakes on didn't stop the car but it put the brakes on on some of those increases that we were seeing in um in our expenditures and so that was enough as you see that through the trend line that was enough then to allow that natural growth to catch up with um with with what our expenses were sorry because oh Brian and let me just add because again our we would not have it ceded that if that revenue had not been taken away from the from the legislature so that goes back to the point of we weren't overspending if we had had that that revenue back into our sources we would have never become out of whack.

So by by doing that that avoided us having to do Draconian cuts when we knew that we would be able to grow out of this without um without damaging our reserve funds at the same time so that it just it just was that pressure valve that allowed us to get through these next few years and then you know go back into the black where we will maintain that um balance between our our uses and our sources on that.

So so maybe we've delayed some projects and is that what you're saying where we are yeah yeah we we have and and we've we've cut things we've looked at different efficiencies that the departments have all those things that council has challenged us to do and and um council member adams made made a good point um I I think during the strategic um planning session as well where we were talking about well these two percent you know council has different priorities and and different emphasis so you know throughout the city but what we've seen and and and you'll you'll see this as we as we get into the different budgets and what we've seen there's belt tightening that can happen in every department inefficiencies that can happen in every department.

There are things we can do better and more efficiently in those areas as well.

And in the and those areas have responded.

Now, moving forward, because I think we've we're on a good trajectory, assuming you know, all of this continues, you wouldn't see necessarily across the board like that.

We would we would have to be more strategic to your point, council member Adams, where um we would start making some of those, you know, more challenging choices about you know, where should should certain programs be eliminated or or whatnot.

But but right now, what we're seeing is that we were able to grow out of this um and and this trajectory without having to make those draconian cuts just by tightening our belts and looking for efficiencies.

I mean, we we can all do that, right?

You think of personal expenses that you have that are maybe, you know, uh you could cut out that you know, subscription to the 37 streaming services we all, you know.

Uh you know, you you look at those things and what can you live without, right?

And and those are some of the the discussions that our departments have had of you know what are what were the nice to have on some of our softwares and programs and uh other things that um we've been able to look at and say, you know, we're not really getting the bang for the buck for that, so we we should eliminate that.

And I think that's healthy.

I mean, I think that's really healthy, just like it is for any family to look at that.

It's healthy for us as an organization to look at that, and that's where some of these across the board belt tightening's been been very helpful as well.

Absolutely, and I think the question is our residents appreciate that because that's exactly what they're doing.

So thank you.

Yeah, it's it's just as yeah, I mean, that's a really good point, and we get it.

Our our residents are dealing with those inflationary pressures, and they go to the grocery store and everything's more expensive, and and so they're belt tightening, and so we should be too, and they and they deserve that, you know, from us to to act as they have to act, as as we all have to act in our you know, non-city roles um of making sure that we're being good stewards of of the resources here.

We call that spring cleaning.

Yeah, Mr.

Rudio.

Uh Brian, is this uh looking at the current for forecast, the ending reserve?

Is this the I think this is the largest ending reserve uh percent that I've seen in my council years.

Uh mayor, council member Heredia, I believe it is.

Um we just the way the the forecast has come and um with the fiscal responsibility and the fiscal um stewardship of the departments and being able to do those two percent for the last uh two fiscal years, and then this fiscal year coming up and with the revenue that we're um seeing hopefully gonna grow out of it.

And um, I believe it is one of the highest, if not the highest out of the in the fifth year that we have uh presented.

Yes.

And then uh and I think that leads to the you know, why we do this every year, right?

As we move on to the to the budget discussions, we gotta understand that, you know, yes, we drop, but I've never seen it drop below 20% since I've been on council.

So just to remind folks, uh colleagues and folks out there, is that I think our staff does a great job in measuring these pieces and forecasting that.

And so it's it's something that we we need to also maintain aware that we've we've had these these things uh as far as uh the success uh as far as forecasting this work.

Uh on the on the sales tax piece, um are we are we still one of the lowest collection of sales tax in the region uh and including Tucson?

You know, when you look at the home home uh comparison piece, right?

Um I think you know that dark green graph, uh dark green bar, seems like we're still kind of as far as collection, as far as the homeowners annual costs comparison.

We're still we're still one of the lowest, I think, or or we've made some progress, you know.

When I I think when I first came on council, we were the lowest, I think, of collection, and we just didn't have kind of the assets.

I think we've done a great job, and I think it's as imperative to keep on doubling down trying to uh create more sales tax revenue opportunities, right?

And so with some of the large projects that we're talking about in the upcoming months, I think having having that uh as a as a thing to having in our heads as far as all right, what do we need to keep on collecting more sales tax revenue, right?

And so to the joke that Mr.

Butler mentioned at the Cubs game, you know, he saw uh all those people and it's sales tax revenue, right?

I think that frame, that frame, I think we need to maintain that uh, you know, you know, being so reliant on sales tax is gonna be an important aspect to how do we uh create more opportunities, especially the size that Mesa is, right?

We shouldn't be the lowest or the top three lowest in this graph, right?

We should be one of the top, right?

Where uh, you know, I see Glendale with that sales tax, right?

Like humongous, right?

So of course they have a couple couple things that spur up a lot, a lot of sales tax, but uh we we should have that mentality as well as as we move forward with these years.

But yeah, uh uh mayor and council member Heredia, um when we look at excuse me, sales tax uh revenue per capita, uh Mesa is the second lowest compared to the Valley Cities.

Um we also have a 2% sales tax rate, different cities have different rates.

Um Glendale's at a 2.9% sales tax rate, whereas ours is two percent.

So um, you know, we also don't have a uh sales tax on groceries, so that also impacts our standing comparing to other cities.

And so may Mayor, Councilmember Heredia, also um to your point about how heavily reliant the city of Mesa is on sales tax, uh, to that point is when we were in COVID and people and people were shopping local, we saw a significant jump of our sales tax because people are shopping local.

Now that things have opened up, some of them most people have gone back to their normal routines of we export a lot of our sales tax to Scottsdale, Chandler, Gilbert, things like that, to where if we can keep it in-house and shop Mesa, that would definitely help out with the sales tax growth of the city of Mesa.

Yeah, I mean, I think Scottsdale's doing a better job because it's people that don't live in Scottsdale that are paying the sales tax.

I mean, if you live in Glendale, you know, you're paying it.

So we we want to be towards the lower where yeah, where we get where we create, like you said, we create those opportunities for people outside of Mesa to come in and spend money.

And that's what we're working on.

We are we're working on that economic development.

Yeah, and to um Mayor and Council and to um Chris Ovie's point is that the city of Mesa does not have a food tax, and almost everybody else has a food tax, so they're collecting tax on the food also.

So that um is uh so when someone goes and purchases food, but then they also purchase something else there, we're getting a little bit of the sales tax to where if you go and purchase food at somewhere else, they're getting all of that sales tax there.

Not if the legislature has their way.

We um but but that's the intentionality that this council has told us on the retail side that they want to see us do everything that we can to capture that instead of just you know, and that's why we're as as council member Heredia alluded to, I mean, that's why we have some great exciting projects that are that are in the works that are game game changers on uh the type and quality of retail.

But um also we we uh the council has maximized the opportunities along State Route 24.

We have new car dealerships coming in that are major sales tax drivers.

We have some big box retailers that are looking at locating in parts of our city, which are big um sales tax drivers.

And so uh taken together, it's I think the fact that we are looking at retail and the quality of retail um definitely helps and and Brian and Chris really hit it though.

I mean, when you when you compare what we tax versus some other cities, and then the rate that we tax, that also comes into play though, as why we look at that lump sum number and say, well, we're you know, we're lagging, you know, a Glendale, but we're we're almost a full cent cheaper than Glendale, and they have a food tax on top of that as well.

So those are those are some of the factors as well.

But we all know we we want the city to step up its game on the quality of retail, which drives larger numbers.

Like you said, in Scottsdale, it's it's luxury retailers, right?

When you go and you purchase from some of those um shopping establishments, those are those are higher end uh products in in a lot of cases, and so um that that drives obviously a higher sales tax return on on that sale.

Um so those are all the things that we've got to work on and are working on.

Can I ask one question about that?

Well, I really need to understand something.

So for the net sources and uses, I was curious to know uh actually I guess it would be total sources.

Do we include we we were talking about the one-time your carryovers, those one-time expenses?

Do we include the funds that we receive as a city of different grants in those those sources that we've received?

We're receiving money, I know, from an outside source, but we're still spending it.

So I know that in the ledgers, it's gonna show money came in, we spent that money.

So, how does that affect these numbers?

Yeah, no, mayor, uh, council member Taylor.

That those grants do not affect these numbers because those are recorded in a separate fund.

It's a restricted fund, so we're able to track where required by general accepted accounting principles and government accounting to track those in a separate fund as a restricted fund, because that's all they can be spent on is whatever that grant is allowed.

So we do not um put it in the general governmental fund.

So those are not included in this.

Okay.

So they're in the overall budget adoption, just not in the general governmental.

In this specific.

Thank you.

I was just trying to clarify that.

And I just also want to say, remember, Glendale has two stadiums.

They turned into Swift City, and they just built a giant hotel with a roller coaster behind it.

So I mean, give yourself some grace.

Mayor, just a quick sure comment.

Um, just a couple things.

Um, it would be helpful for me if and you you you may have presented this earlier, so I apologize or somewhere else.

But if you have information on the various cities we've shown here in the graph, what those tax rates are, um, I'd I'd appreciate that.

And that's not anything I need now.

But the comment I have is um uh to Mr.

Butler's comments earlier about uh supporting retail that generates sales tax.

Uh I'll give you an example.

When I see someone come along who wants to use, for example, a uh an abandoned corner location big box, and they say, you know, I'd like to sell high-end trucks there.

Um I I think in in cases like that, we we need to work pretty hard to find a way to say yes, as opposed to find ways to tell him that no, you can't display them there or whatever.

And I'm just using a hypothetical, but this is where I think department to department to department, we can work hand in hand to achieve these objectives and try to facilitate especially the higher end stuff.

When uh you know, if you you sell 20 or 30 of these things at 50 grand a pop every month, we're smiling.

So uh just to comment.

I think it it goes to an overall attitude of um everyone involved in in reuse and whatnot.

Let's understand how it affects the city, not just in terms of reuse of a building, but in terms of generation of transaction privilege tax.

So I'm thanks for those comments.

I I appreciate it.

So, mayor, uh, council member Adams, uh, to answer your first question.

It a list of the sales tax is part of the homeowners comparison.

It's the very last page.

There's a table that shows all of the rates of each individual city for uh water, wastewater, it shows the tax rates, but we can definitely send that um particular slide out to um the council.

But it is on if you go on our website and go over the homeowners comparison and scroll down, we do have that table there that will show all of the tax rates for the cities.

Okay, thank you.

I can do that, or if if you want to send it out, that'd be great.

Thank you.

Thank you.

Carry on.

So with that, I think we already we've been through, we've talked about these slides.

We'll uh uh move on to the utility fund.

All right.

So similar to what Brian presented on the general governmental slide, this is just a side-by-side comparison of uh some of the financial policies and the financial principles.

So just to highlight a couple of these, um, the financial policies we have maintain a reserve balance of eight to ten percent, similar to the general governmental our financial principles, we strive for a 20% or higher uh reserve fund balance for the utility fund, and then uh financial policies do call for an examination of utility rates annually, and that um pairs with the smooth rate adjustment um uh process that that we've incorporated, as well as looking at the equity between the residential and the non-residential rates that we have that discussion um, particularly with water in the last uh rate cycle.

So utility operations um overall, we view the the utility fund and it's reviewed as a whole.

So each utility is operated as a separate business center.

However, there will be financial fluctuations uh every year.

So a good example of that is due to weather conditions.

So if there is uh less rainfall, we'll typically see higher water consumption and higher revenues in the water utility.

Uh conversely, if if we have a warm winter uh like like this year, we'll see less natural gas usage, and that'll reduce revenues uh into that utility.

So that's why we review it as a whole because each utility is going to fluctuate on a year-to-year basis.

Again, this reserve balance can be used to smooth rate adjustments year to year, and that balance can be used to phase in new programs or any changes to operations.

So similar to general governmental, the utility fund has experienced inflationary pressures.

So five of the six here over the four-year period from fiscal 2021 to 2425 increased more than 50%.

The first one fleet maintenance and repair, the vast majority of that is going to be our solid waste fleet, which is picking up the bins and barrels every day.

Solid waste disposal is going to include landfill and recycling costs.

So as we're looking at additional cuts on the Colorado River, that's going to put more expense pressure on that wine item.

We've seen chemical costs increase 57% across water treatment plants and wastewater reclamation plants.

Both of those have increased more than 60% over that four-year period.

So just looking at a graph of the operating costs of the utilities and how much they have increased since 2021.

The dash line represents fiscal 2526, which is the current fiscal year.

So these are the quarter-two-year estimates.

We require departments to submit uh quarterly revised uh revenue and expenditure estimates.

Um we're still in the middle of fiscal 2526 and that'll fluctuate depending on how the rest of the year goes.

The one that sticks out here is the wastewater utility.

Um as discussed during uh last budget cycle last year, um, there was a significant increase in the 91st Avenue water reclamation plant um budget.

That's the biggest wastewater plant in the state that Mesa participates in.

Uh and it's it's a an aging plant that requires um more maintenance and upkeep costs.

Then just looking at uh some of the priority utility uh capital projects.

So uh the Central Mesa reuse pipeline uh will be fully um completed this year, wrapping that up.

Uh the signal beauty water treatment plan expansion is currently under construction and will be uh through 2027.

The smart metering implementation will be completed by the end of the calendar year.

Um there are various natural gas capacity expansion projects going on, and then uh the Broadway Road improvement with transportation.

So this is a streets project, um, but there is coordination with the utilities to review if there needs to be upgrades or updates to the utilities when we have streets projects.

Um, this project in particular involves the electric gas and water utilities, so they'll all be participating in that project.

Uh so similar to general governmental, this is a graph of the uh updated forecast.

Uh so um the dashed lines represent the projection and forecast.

The uses for the first three years from 2526 to 2728 are above the revenues, which results in a drawdown of that fund balance, the blue line uh slightly dropping.

And then in 2029, the revenues are above the expenses, which brings back the utility fund balance to slightly above 20% in the final year of the forecast.

So just a reference point where we started with the adopted budget.

Um if if you look at the uh middle part of the table, the total net source and uses, we had a negative net source and uses until the very last year, 2930.

We also had a very low uh reserve balance percentage in 27, 28 and 28-29 of 4.9 and 4.6% that did grow back up to 7% as we had the positive net source and uses in 2930.

So, what this forecast has uh just as a reminder, um, this was before we considered the capacity fee.

So all growth projects needed to be funded through the utility fund, that's about 400 million dollars worth of projects.

Um just looking at at the forecast and what it was, the water department between water and wastewater deferred and pushed out 180 million, 180 million dollars worth of plant and system infrastructure projects out of this forecast window to try to accommodate for some of those priority projects.

So as we roll forward to the current forecast, this does include the impact of the capacity fee.

So the 400 million dollars worth of growth projects is now being covered by the capacity fee, and it's not included in the base utility rates.

And because of that, we're able to move those deferred projects back into the forecast, and those are going to be um plant repairs, um, pipe projects, um that that kind of thing.

Well sites.

What's that?

Putting well sites in there.

Yeah, yep.

Wells are in.

Um are those bonded projects or okay so if if the well um mayor, council member Duff, if the if it's a new well for growth, then it would be a capacity fee project.

But if it is uh a rehab of a current well, then it would be uh as a part of the utility fund forecast.

It would be uh uh yeah, uh um a pledge uh revenue obligation.

Well, being under 20% on a reserve hurt our bond rating.

So we do have that uh 20% um for the credit rating agencies to to take a look at.

Um in the 24-25, you see, we had the the 21.4 percent.

Um this forecast is uh better than what we had last year, uh, but that that reserve balance percentage is something that they look at.

Yeah, mayor, council member Duff.

Um they look at the whole the forecast as a whole also.

So what they want to see is that the utility is um financially sustainable, and that and so when they're looking at that, they also look at the net sources and uses along with the reserve and with them seeing um with the uh net sources and uses now going positive in fiscal year 28-29 compared to what we showed them last year, and with the reserve balance growing, growing out, that uh we'll definitely um they'll consider that when they're doing our bond rating.

Ms.

Goforgive.

So did you say I think I missed all that the adopted budget forecast was prior to the capacity fee adoption.

So with the current forecast, you pulled out.

You said did you pull out that 400 million of projects for growth?

Yeah, mayor, council member go forth.

That 400 million dollars is now um being covered by the capacity fee and isn't included in the utility fund, which is the base utility rates.

So and do and mayor, council member go forth, and to kind of go into a little more detail is that the debt service payments are not in there.

So we wouldn't have 400 million expenditures in our forecast.

What we do is we take okay, it's the 400 million.

If we have to issue debt whenever we issue debt, then we put that debt service into the forecast, and that's what is part of the forecast.

And so I would assume in your sources the debt's in there as well.

The debt would be out.

Yes, if we did issue debt, it would be in our no it was not the debt issuance is not part of our sources because that's tracked in a separate fund.

But the debt service payment is but the debt service payment for that because what the debt service payment is um is from the revenues, so when the revenues come in, we pay the debt service.

But when we do a construction uh of a plant or a well, that gets recorded in a capital project fund, so it's a separate fund, so we can track those expenditures separately, and when we issue uh a bond for that project, those revenues go in to offset those expenses, but then the debt service goes into the operating fund.

And that's the same with the general fund.

That is the same with the general fund, yes.

Okay, Mr.

Adams.

I'm uh pleased to see these numbers, and in my experience, I'm glad the question about our bond rating was asked because in my experience as a credit management professional over the years.

Um, if I were looking at these numbers um comparatively, I would see a a significant increase in improvement in uh what we're doing here and some of the changes made.

So I can only speak for myself on my experience, but if I were making a an underwriting decision here or a uh evaluating credit for whatever purpose, I would see significant improvements.

So I think that's uh that that'd be my comment to this.

And mayor, mayor, council member Adams to that point.

The big um the big driver of this, which helped significantly is uh council adopting that capacity fee and being able to use that capacity fee for um growth paying for growth.

Yeah, mayor council, that that is the key, right?

Because the the big change is now with the institution of the capacity fee, we're back to the principle of growth paying for growth, which then takes uh improves our utility fund, which ultimately helps our ratepayers um on and in the long run.

And so uh we also have heard council loud and clear that they want to you know continue that philosophy of growth paying for growth.

So we will be doing uh an impact fee study this year because the capacity fees only covered water and wastewater, but there are other costs to growth that should be borne by the growth itself and not and not by other ratepayers or taxpayers in the city.

So we'll be doing that impact fee study.

That takes longer, as we discuss because of um limitations in state law about a two-year implementation time frame after after that, but um we we certainly adhere to council's direction on wanting to make sure that growth is being responsible and it's not being borne on the back of our um other taxpayers.

Mr.

Rudy.

I think on uh on you know, the slides on the inflationary pressures you put out uh no four four-year increases there and talking about growth.

I think we've had quite a bit on the commercial side over those four same years, that growth, uh, especially in Mr.

Summers district, uh, with some heavy users there and a lot of uh uh industrial commercial, um so do you look at you know I I understand inflation and pressures are probably the most like costs burden for us, but that the the growth that we've had over the these last four years that you you put on uh in these slides, uh you looked at uh how much that pressure on just growth has had on us and and kind of looked at into uh what that what that cost was.

So, yes, mayor, council member Heredia, we do um in we've always looked at okay, what projects um especially before the capacity fee, as we mentioned, we had 400 million of projects for so Signal Butte was in there and wells were in there, and a bunch of other things were in our forecast of of that.

So we it's a balancing act that we work with the utility departments of okay, what projects do we need to do for growth, and what projects do we need to do just for repairs and maintenance?

And it's that balancing act of which ones do we need to do and which ones do we want to do, and to be able to balance out that forecast and what we would do is we work with them to see, okay, what projects it would be, and then we'd work with the city treasurer on what's that debt service payment, what's the impact to the forecast, and then we adjust from there of what projects with the adoption of the capital with the uh capacity fee that helped out significantly because now with that 400 million, we were able to take that out of the operating forecast and be able to fund that with the capacity fees.

And now what we take a look at is okay, what repairs and maintenance projects can we bring back in there, and how does that um how does that work with the forecast and be able to stabilize those?

As far as population growth, no, right after the census, we were just above 500,000.

I think now probably closer to 530, I'm assuming in Mesa.

Um, how's that affect uh the the forecasts here as far as population growth?

Um mayor and council member Heredia.

We when we um update the utility fund forecast, we look at the account growth and we make a projection for each utility.

So each utility is gonna have different service areas.

Um for water, wastewater, solid waste, those are entire city uh service area.

And yeah, yeah, we we um we look at the account growth, um, what type of accounts they are and how that's gonna um impact our revenues.

Okay.

Vice Mayor, you're turn.

You've been patiently quiet.

Thank you, Mayor.

I've uh appreciated the uh commentary and the questions on when it comes to water, thinking back to our discussion uh a little bit earlier on sales tax revenue and and growth.

The the idea there is that by growing our sales tax base, we can help uh help add to our uh financial stability.

Um from a water perspective, tying that in.

I think we need to start looking at water as a commodity in economic development, thinking about if we're gonna bring in uh companies that how many jobs does that company bring in?

How much water did how much water does it use?

Uh how much sales tax revenue can be brought in versus how much water it can be used.

So what I'm getting at is I think there's a balance here where we need to uh point our economic development strategy on bringing in the types of employers and retailers that are going to um bolster employment and and our sales tax revenue based on water, because we've seen some some businesses come in, they use a lot of water, they'll create a lot of jobs or economic activity.

So we need to start thinking in in that direction.

Um that's my statement.

As a question, uh Councilman Adams had a some great comments looking at the books and the numbers uh for bond rating.

The question I would have is there's a lot of discussion about the the cuts Arizona will take and it's Colorado River water.

Do we anticipate or have we experienced uh those discussions and that potential negatively impacting our bond rating when it comes to water utilities?

Mayor, Vice Mayor Summers, this is Mike Kennington.

Um yeah, we actually had a meeting with Fitch, the the folks from Fitch last week or two weeks ago, and that did come up as one of the risks.

Obviously, they're looking at ways to make sure that their bondholders or investors get paid back, right?

And so uh as they look at the revenue, as they look at uh the the fund balance, uh they do look at also the the risks to the water source.

And so uh we did have a discussion about that as well.

That's also part of our uh our offering statement when we do issue the bonds is one of the risks for the the bondholders as well.

So, mayor and and vice mayor, so the sooner we could get some certainty.

I but we all know um it's it may be a while.

We may have a bumpy road.

I mean, we all hope that an agreement's reached, but if not, it could be litigation and that could stretch out for years.

And so they're they're we're entering into a time where there's definitely uncertainty on how the markets will react uh to this.

And so we'll that's something that we're all speculating on right now, but um, if and when an impasse or or decision from the feds comes down that we'll have an impact, we'll we'll have to adjust accordingly.

Thank you, Mr.

Butler.

I think that uh just reinforces my point of thinking of our water more strategically in our economic development strategy.

And I I will say that that point, Vice Mayor.

Um, I know if Jay were here, she'd be the first to say we we have passed up on some leads um and some companies that from GPAC and ACA who have reached out for us and uh on site selection, but um the juice wasn't worth the squeeze when it came to the amount of water they were requiring versus the number of jobs that they were producing, and and we politely declined and and uh they went on to other communities to look for that opportunity.

So um we hear you loud and clear, and we'll continue to uh make sure that's a priority as well.

I think that goes back to um also what we talked about at the strategic planning session, Jim brought it up, and I talked about it a little bit, but that cost benefit analysis to what you bring into your city, the land that they use and the value per acre based on what benefit they're bringing.

So um whether that's uh a cost in water or um or and how much benefit in sales tax to the amount of land that they're taking up.

I mean, I think those are evaluations that are legitimate to have prior to rezoning or um you know uh uh ha having a new company come in.

So thank you, Mike.

Uh Vice Mayor, any other follow-up?

No, Mayor, thank you.

Mayor, I have one thing I want to say incoming public question.

So um going back to the amount of the reserve fund.

I I don't have it up right now, yeah.

Okay, showing the increase, I think 20% right, fiscal year 3031.

Is it just in plain terms?

Am I correct in understanding that we're trying to basically keep a 20% or above reserve fund so that we can buy debt?

We can issue more debt, we can get more bonds.

Council uh mayor, council member Taylor, that's not the specific why we do the 20%.

The 20% shows that we are fiscally responsible and sustainable, and it's a goal for ours.

Um, as I said, our principal is eight to ten percent, but we like to have over 20% to show throughout the forecast because it does help with the credit rating agencies.

They want to be able to say, so when we can issue debt or when we need to issue debt, the credit rating agencies rate us at uh very good or good, so we can get that lower interest rate.

So when they see that we are sustainable and that we're growing out of our negative to the positive net sources and uses, and we see that we have a good reserve balance, that gives them comfort that we're able to, if if anything happens, we're still able to pay our debt and and so forth.

So but ultimately it is so that you can get a good rating to take out debt.

There's one of those, yes.

Okay.

Because they're the public is gonna ask why do you have all this money and you don't offset the cost of utilities, right?

Like that's gonna be the number one thing that we're gonna hear over and over again.

And so I guess it's philosophical at this point.

Do they want us to have a good rating so that we can get a lower interest rate on debt, or would they rather we keep it lower?

You have reserves.

No, but that's the question.

I think that the we need an explanation of why you keep reserves.

Yeah, mayor have a lot of people.

And give it like real basic.

Yeah, yeah, definitely.

Uh so ultimately or fundamentally we keep reserves to pay for unexpected expenses in the future.

And so you think about uh an organization like GFOA, a finance organization, they look at reserves and they measure it by number of months.

So when we talk about a 20%, uh they look at it in two months.

Is that is their is their goal, right?

Which is about 16% fund balance.

So it fundamentally a reserve is set up for unexpected unexpected expenses in the future.

Yeah, and and that is the primary driver.

Now, uh, an ancillary benefit of that, of course, is that it improves your credit rating, but that's a reflection though of the trust then that the rating agencies and the financial institutions have on the city that it can weather those storms.

So it all comes back to being able to cover unexpected expenses, and when we show that we've been fiscally responsible and we have that, just like we saw in the general governmental fund, um, you know, we were responsible with our reserve fund, and then when we had unexpected occurrences, um, like we happened, we were able to to uh responsibly use that.

It's the same philosophy on the utility fund as well.

Yeah, I'm talking about the amount above what our minimum standard is.

And I'm I'm I'm a big advocate of going a little bit above your minimum standard, but I mean, we're basically doubling our minimum standard.

So these are conversations that we're gonna have to address in terms of like, wow, that's quite a bit above what your expectation is for the city.

But a strong reserve is considered 16 percent.

Well, that's from one organization.

It depends that's our that's our internal policy.

But you said this organization is a good thing.

Mayor and council member go forth.

The GFOA says two months, but it you know, a lot of cities and towns have different numbers.

Um Gilbert, for example, has 25%.

Is there a minimum?

Sure.

I just I want us to be able to publicly address that because that's kind of the question that I've heard many times.

Oh, you guys are so above the standard city.

Why aren't you using that to better benefit your residents over the financial institutions for which you would like to take debt out at a lower interest rate?

I would debate over the standard city, and also let's take 10% off these um reserve balances.

You're then you'd be looking at three percent, two percent.

That's a very dangerous level to support any interruptions, any things that happen, especially when you're talking about utilities right now.

The cost of electricity, the cost of service, the cost of water, it's a very volatile market.

It is not a stable market.

And if you want to pay when we do do need to make improvements, like central reuse pipeline, expanding the water, do we want to pay a higher rate?

What's the what's the cost of that?

Great question.

Yeah, yeah.

And mayor and council, that's why what we look at the city, we look at it as the five-year forecast.

We look at it as a whole.

So when we say, okay, we're at 20%, yes, we'd like to be at 20% at the end.

But we also look at years three, four also to see, okay, where are we at?

Because if we do have a uh an incident or an unexpected expense, uh, or like we have a warm year or a dry year or or whatever, we can fluctuate, we can we have those reserves to be able to make those reactions and plan for those things.

Um, and that's why, as for Councilmember Duff, when we drop to 12 and 13 percent, that's getting right there to our minimum of 10 percent.

And so, how do we grow back out of that?

We don't want to keep keep going down to the 10 percent, because then if something happens, um, then we have to kind of uh switch gears and see what we need to do with the the revenues or reduce expenses.

Yeah, I think it's a quantitative question.

Like, how many times have we had to use those emergency fund emergency funds, those reserves?

This is this is helpful for the public to understand.

Oh, if we can give you some examples in which we've needed to do that, they will have a better understanding of why we buffer it so much.

And if it's a very small number of times, maybe that's a bigger discussion we have later.

If it's it's more frequent than we realize, then great, we have empirical evidence that we can provide them.

Yeah, absolutely.

Mayor, we can sorry, let's be mad.

Mayor, uh council member Taylor, we can do that.

It also depends on the um the incident.

So, for instance, um water main break up on McKellups was 15 million dollars.

So that's one incident.

But it so I think it all depends on what kind of incident we have, but we can definitely kind of come with up some of those emergency ones, or what we also have reserve balance for also is any economic development that comes that hey, you know what, we need to we need to um upgrade our system or provide for these at a timely manner to where we we don't say, okay, well, you know what, in the forecast we can afford it in 2627, but we want that business to come in now.

So it gives us that flexibility to be able to um have those.

That's a good example.

Yeah.

Yeah, and ultimately it's to the benefit of the ratepayer at the end of the day under under any of these circumstances.

We talk about um those reserves and the ability to draw down those reserves during the these high escalation costs that we've seen over the last few years.

We if we wanted to offset those cost increases, our rates would have been dramatically higher about what we needed to to go out to to our uh ratepayers for.

So we were able to um lessen the burden of those rate increases because we were able to responsibly draw down um some of those reserves and utilize some of those reserves for these these high cost escalations, and then ultimately, too, when when um to to the question that someone had asked you about the benefit of the financial institutions.

Now, at the end of the day, the benefit is to the ratepayer because um we we have to, these are large massive projects that we're we have to issue debt, and and it's only fair to issue debt because these um these these facilities last decades, and so the ratepayer today shouldn't bear the sole burden of that, it should be whoever the rate payer is over the lifespan of that um of that facility.

But the if we then have a higher um fund balance that does uh ultimately get us a better rating, well, that means that that is less expense that our ratepayer is going to have to bear.

So they're the ultimate beneficiary um of that.

So those those who are listening right now, when you're saying that because we had those reserves and we were able to draw we were able to draw down on them, we did not have to increase the cost of our utilities as much because otherwise we wouldn't have had those reserves and we would have had to drastically increase the costs.

Correct.

Correct.

And saying that that's the balance based on the case.

That is the balance, that is the balance that we try to strike at the same time.

And I think you made a great point, Scott, and Mike, you want might want to say because I don't know that people know our philosophy on debt and why we go out.

You just you just said it, but I think it's important to say, and it is because of that.

Yeah, I mean, I'll just reiterate the cost among decades of residents and not those that are living here now.

So if you could just reiterate it.

Mayor Council member go forth.

Uh definitely, City Manager Butler said uh said it exactly.

Um we try to match the benefit, the use of the infrastructure that lasts for decades with those who are paying for it.

So rather than having somebody save up cash for many years and try to pay for it, and then other people use it over the life of the infrastructure, we try to match that benefit with those who are paying for it as well.

So if it costs 50 million dollars, and you're only gonna live here for four or five years, you're not bearing the brunt of the load for when the city dumped all that money on that project, and then you're out.

Right.

And the next person who comes in says thank you for paying for that project for me.

Exactly.

That that is yeah, thank you, Mayor and Councilmember Taylor, for for framing it that way because that's exactly it.

We just we just feel that these large massive projects that would benefit a home for 30 years, the homeowner, whoever that may be, that may be multiple homeowners over the course of that that 30 years should should who benefits from that um wastewater plant or that water treatment plant should um share in that share in that burden as well, because they're the beneficiary of that, and and whoever just happens to be in that home at the time that we built that plant shouldn't bear the full brunt of something that's going to benefit generations of uh users in that in that particular area.

And that's that's the philosophy that Gilbert took.

And that's why you saw a 25%, I think a 45% the next year, they have something like 70 some percent of increases over two years because they chose to pay for it in a short amount of time.

And so the disruption on their water rates is 75% over two years or 70, whatever percent, you know, that's I think is irresponsible.

Um the other thing is we did draw on our budget that we adopted last year.

We took almost 30 million, 20.4 whatever million dollars of our reserve so that we didn't have to take the utility rate increases.

So we spend it down to keep our utility rates low.

Um our actual costs were much, much more, and we would have to pass it along because the dramatic increases, but we're able to use that.

And unfortunately, there are conservative estimates that we ended up having a little bit of money to pass forward, which helped us in that our projection that we're looking at in this year.

So I love that.

We're doing conservative forecasting, but we are spending down our reserves as we go.

It's not like we're just accumulating, accumulating.

Mr.

Adams.

Thank you, Mayor.

Um I I think this is a great policy level discussion we're having here.

And I think it's great for transparency for people to better understand what these numbers mean and why we set these policies and standards.

So I think this is great.

You know, I uh I'm glad Mr.

Butler mentioned the um uh how this affects a long-term project with a long life, 30, 40, 50 year project.

Um I I look at the uh again the underwriting aspects of this from uh uh uh the perspective of a credit professional.

Um it's sort of like uh somebody with an 850 credit score, 850 FICO score is going to pay a lower mortgage rate than somebody with a 550.

It it's part of the it's part of the equation on the consumer side, and it's certainly part of the equation on either an underwriting, a commercial underwriting, or a business credit extension side.

Uh it it's the C in those five C's of credit, it's part of capacity.

So I think there's a lot to be said for having a strong balance sheet, um uh a rainy day fund, if you will, that when that water main blows and we write a five million dollar check that we weren't expecting to write, we had a place to pull that from.

Um so uh you know nobody likes debt um well, other than lenders.

Lenders like debt.

Um but uh a necessary thing from time to time, and I think that uh what we can do in terms of policy that allow us to achieve favorable rates when we are forced to borrow and we borrow by issuing bonds.

Um I think that's in our favor, and it it has a trickle-down effect.

But uh I I'm really pleased that we're having policy level discussions like this that put these issues out there for people to understand why do we do what we do?

So um I don't know if that contributed anything to the conversation, but just is my thoughts on the matter.

Well, we found the sweet spot on council here, so uh I'm not gonna I'm not gonna weigh in, but uh continue on and uh we'll finish our yeah, and this slide's just a comparison to show the improvement in that fund balance from adopted budget to what we currently have.

So coming up next, as see on the slide, the budget process calendar.

Um so next week we start our um public budget meetings.

Uh so we have one next week on March 4th at the Northeast Public Safety Facility in the community room there.

Then we have two the following week at one at the post and one at uh Gateway Library.

Then we will come back on April 2nd with the city manager's proposed budget for fiscal year 26-27, and then throughout the month of April, we will have uh the department um budget presentations to city council, and then on April 30th, uh we'll come back and present the tentative budget um for uh consideration on May 18th, and then we have scheduled June 1st for the capital improvement program uh adoption, the final adoption of the budget, and then the public hearing for the property tax, and then lastly on July in July when um council comes back from break, we'll um the secondary property tax will be up for adoption.

Is that it is so easy?

Yeah.

Yes, Mayor, it's that easy.

All right, I I'm just gonna add a couple things.

Uh question on the quality of life.

Does that ever sense that, or is that in perpetuity?

That's interpretive.

Okay.

Yes.

Mayor, uh, on that, actually, someone messaged me.

They said they wanted to know the quality of life tax.

I think you said some of it, most of it goes to public safety.

Does all of it 100%?

Okay.

Thank you.

Thank you.

Your question has been answered.

Is it 100% public safety?

So, Mayor is split up, isn't it a little bit?

So there is specific firefighters, the police, and there's specific items of um, I think there was a portion of streets, but there's very specific language within the sales tax.

That's why it's a restricted fund.

So that's why it's in a restricted fund.

And at the time at the time and currently now, uh, a majority of it does go to the public safety for those police and firefighters because of the way um just salaries have gone and the way the tax um comes in.

So it is, if there is excess, there are some um specific areas that uh this quality of life could be used for.

Okay.

Um, you know, to Miss Duff's comments about, you know, we we I'll use the word subsidize our payments on like on water, 10.2 million dollars.

I think we subsidized water so we wouldn't have to raise residential water rates up so high to your point.

We continue to pull down our reserves, replace our reserves.

And that to me, that just builds strong reserves, builds trust, and the voters of Mesa have overwhelmingly trust us in our decisions on our financial goals.

Uh the other thing is, you know, these future bills that are out here, and I continue to bring that, you know, potentially a moratorium for four years on any fee, rate, utility increase that could affect every municipality, city, agency in the state.

And then there's even a bill about delivery of sales points for online sales.

And so if you order something from one of our online retailers and it comes from another source, that point will be sales taxed, not the person receiving it in that zip code.

And that concerns me.

Yeah.

Because that's gonna take revenue away from us if these bills pass.

Um again, uh, as as future, some councils can raise a city sales tax at the dais and have the discussion, policy discussion whether we want to raise our sales tax.

And like uh Gilbert did, Phoenix did, and I think there's some other municipalities, however, our charter dictates we must go to the voters for any city sales tax increase.

I want the voters to be aware of that.

Uh, that might be something we might want to consider based on all the handcuffs being placed on us in the future bills.

So I really I really like having a strong reserve balance for just our savings account.

We draw it down, we replace it, and that means we are very cognizant of our financial positions and weather the storms that are out there for the future.

So with that, uh Vice Mayor, do you have anything you want to summarize or add?

No, Mayor, thank you.

All right, council.

I'll move on to item two if that's okay.

Thank you, Chris and Brian.

Item two is acknowledged the receipt of board minutes.

Is there a motion to that effect?

Thank you, Miss Duff, Mr.

Adams.

All in favor say aye.

Aye.

Thank you.

I motion passes.

Next is current events and conferences attended.

Council members, would you like to share anything?

Mr.

Adams, we'll start to the left and go to the right.

Well, thank you, Mayor.

I I I won't I won't steal anybody's thunder, but uh you and I had the opportunity to attend the ribbon cutting of the Arizona Baseball Museum, which uh is just a wonderful, wonderful uh facility and exhibit, and uh uh I understand there are some uh local uh uh historical artifacts there that uh are very impressive.

And uh, you know, who doesn't like baseball?

But uh, you know, Susan uh Richie and her her group and the uh Mesa leadership folks have all pitched in uh really a great community effort, so it was I was very honored to be uh a part of that uh that ribbon cutting.

Thank you.

Miss Duff.

Yeah, all right, Frankie.

Miss Taylor.

I did get to take a tour of Mesa's um well, Scott Boucher is here.

It's about five square miles of our city's natural gas and electric utilities um our grid.

And I thought that that was very educational.

It is quite a bit complex because we're dealing with there's a lot of technical language.

Um but one of the things that I realized when I was on this tour, and I think this is good to say publicly is when Irma came up and she did our financial statements.

We talked about how we had six point one billion dollars in assets and our 4.8 billion in liabilities, and a big question often comes up of like, well, why can't you just you know sell your liabilities and pay or your assets excuse me to pay for some of your liabilities and kind of epiphany moment when we were at one of we were at the Robson substation, and we're talking about the cost of the substation, you know, the millions of dollars that that cost is Charlie, the gentleman who was giving us the tour, he said, you know, this is one of our bigger assets right here.

And when he said that, I registered with oh, that's right, you can't just sell a generator.

Like that's just not how it works.

So it was a good reminder to me as a council member that we have a lot of amazing assets that are stationary things that we are using consistently, and I'm very grateful for Scott and being my tour guide and breaking down some of the more technical language about gas and electricity.

So that was really fun.

Thanks.

There's electrifying, huh?

Oh.

Thanks for not making a gas joke.

Well, did they take you down to New Magma?

No, no, not in the well, that's a little longer trip.

Miss Go Ford.

No, thanks.

All right.

I'll just add that uh with staff.

I attended the Queen Creek State of the Town in Queen Creek this past Tuesday.

Uh Mayor Wheatley and her team.

It's very uh encouraging to see their growth out there.

They're about 90,000 population for the town of Queen Creek and all the things that they're doing out there.

Uh yesterday I attended an AI literacy roundtable discussion at Sky Song.

I was invited.

Uh there were a lot of educators there, a lot of smart people.

Uh Lee and Ian, Ian left, but uh he accompanied me there.

He's our AI guru, so did that.

With that, Mr.

Butler, can you share future meetings?

Mayor and Council, thanks for the discussion this morning.

And then we will be back here next Thursday for study session at 7 30 a.m.

followed by an audit finance and enterprise uh committee meeting immediately following the study session next Thursday.

And our next council meeting is the evening of Monday um March the 9th, and we'll start with study session at 5 15 and then the council meeting immediately following that.

Thank you.

All right.

I'll just put a plug in on March 7th.

I know it's a little ways away.

That's our Lehigh Days Rodeo.

If anybody wants to come out with your kids to a rodeo barbecue, pony rides, and petting zoo.

So it's down at uh in District One.

Mr.

Adams will be there.

I think he'll be out.

What will you be doing?

Well, I I I won't be uh roping and a riding.

I'm not I'm not going for eight seconds on anything.

But I'll certainly be there.

It's a great event.

Love it.

Go ahead.

Well, I was gonna say we'll let you participate in the chicken chase.

And if you're not into rodeos or want to try to bridge two uh events, um we have the baseball block party in downtown Mesa on the 7th as well from 11 to 3.

Competition.

All right.

A council entertain a motion to adjourn.

Thank you, Miss Taylor, Miss Goldforth.

All in favor say aye.

I thank you, Vice Mayor.

All right, everybody have a good rest of the week.