In a gloomy forecasting of dwindling cash reserves over the next decade, an Oro Valley budget committee suggested last week that the town adopt three new taxes to staunch the flow of red ink.

"At this point, the town is not short on cash," said town Finance Director David Andrews. He played down the issue of declining reserves, but said in a phone interview that there is a need for future revenues.

"But if we are to do everything we need to do to provide preventive maintenance for roadways, police, park and library services, then we need to find income sources to pay for all of that," Andrews said.

The town could generate an extra $4 million annually by hiking its construction contracting tax on contractors and developers from 2 percent to 4 percent and by requiring a 4 percent tax on electric, water, gas and local telephone utilities, according to the Oro Valley Budget and Bond Committee report presented at a Town Council study session Aug. 18.

A third possibility is a 2 percent "use" tax on cars and other big-ticket items purchased through out-of-town dealers offering "no city sales tax." Marana already has such use tax in place and the city of Tucson adopted a use tax July 1.

"The use tax is the twin sister of the sales tax," said Andrews. "If you don't pay a sales tax, and you're an Oro Valley resident, you'll probably pay a use tax."

City of Tucson Finance Director Scott Douthitt said a use tax would have to be self reported by city residents making purchases.

"Say someone went to Oracle Ford to buy a vehicle but then registered the car in Tucson," he said. "We can look at new registrations and bill those owners."

By and large, the use tax targets businesses more than individuals. "Most Arizona cities and towns are very successful with the use tax," he said. "It actually protects local businesses by keeping money in the community."

All three tax options could be adopted by city ordinance and would not require a public vote.

The town already imposes a 2 percent sales tax on non-grocery retail purchases, but could also require a sales tax on services such as health spas, fitness centers, dance studios, tanning and nail salons or on residential and commercial leases, as Tucson does.

About two-thirds of Arizona cities and towns exact a fee from utilities, 54 percent of those by a franchise agreement, which requires voter approval. Another 13 percent of cities and towns, including Marana, impose a 4 percent sales tax on electric, gas and water utilities. Oro Valley already exacts a 5 percent tax for cable TV.

Tucson has had both a 2 percent sales tax and a 2 percent public utility tax on utilities for many years, said Douthitt. The city also collects what amounts to a 4 percent tax from Southwest Gas and Tucson Electric Power through franchise fee agreements for rental of a public right-of-way. The utilities then pass those costs on to the consumer.

Construction contracting fees are widely used, according to the report. Increasing the tax rate from 2 to 4 percent should benefit town coffers as new contracting wanes along with the inventory of available land and the town transitions to "renovation/upgrade contracting."

The committee also looked at other possible revenue sources, including a primary property tax, used by more than half of cities and towns in Arizona and a secondary property tax, required by about a third of Arizona cities and towns.

"Those two avenues are always there," said Budget Bond Committee Vice Chair Lyra Done Done. "Most people do not want a primary property tax. It's not a popular thing."

A secondary property tax "is a great possibility" to help pay for the proposed Naranja Town Site, she added, but only when a plan for the site becomes available and real costs can be estimated.

The committee projected increasing deficits in the town's cash reserves to balance the budget, noting a drop in the current year to $6.6 million from $16.9 million in 2002-2003 and $19.2 million in 2001-2002.

Most of that $10 million borrowed from cash reserves last year went to "extraordinary expenditures" on highway and road projects, according to the committee.

But town engineer Bill Jansen believes the committee's fund projections compared "apples and figs."

"The figures seem to portray that we're in a construction system we can't afford, but we're not," he said. "Town funds account for no more than 10 or 12 percent of total construction costs. By including road construction it distorts the whole picture."

Town finance director Andrews explained it this way: "For the purposes of presentation, separate reserve funds were combined in an attempt to be concise. You probably need to segregate the data and look at each one separately.

"We are now using up cash accumulated in the roadway impact fee fund for the widening of La Canada and Tangerine roads. So you'll see those cash reserve funds going down and you should."

Roadway impact fees do not represent a true reserve fund because by law, the town must spend all accumulated monies within five years, said Jansen.

Reached by phone, Oro Valley Mayor Paul Loomis said he agreed with his town engineer, and added that the town is now in the process of reconciling the figures.

"We're spending more than we're taking in," he said. "But I don't think the reserves are declining quite as much as the committee presented.

"If you look at the budget and look at the process we go through in creating the budget and all the departments involved, you can come up with a wide variety of forecasts depending on the assumptions you make," he said. "The bond committee assumptions are very conservative, which is what they were told to do. Their report had not been passed through public works prior to the study session.

"It looks dire on paper because of commitments to roadway projects that rely on future impact fee funds," said Loomis. "I think we are going to reconcile those numbers and come to an agreement on future budgets going out 10 years."

The budget committee noted that the town's general fund continues to be stable. "We've used $1.2 million out of the contingency reserves to balance the budget," said Finance Director Andrews. "We still have a healthy reserve of about $5.8 million," a figure higher than the required 20 percent of the $18 million in revenues projected for the current year.

Bill Adler, a frequent town critic, believes that the current budget could be balanced without digging into reserves at all. "It seems to me that for the community to be assigning taxes without considering the one tax that would raise the most revenue - property tax - creates a dilemma for citizens of this town.

"A responsible action in the short-term would be to look at all areas that could be cut," he added. "The town already subsidizes the Northern Pima County Chamber of Commerce, GOVAC and a Tucson-based economic development council."

Examining the budget for possible cuts was not "given to us as a charge," said Done. "But I think it will be an automatic thing if the town imposes these taxes and we still see continued downgrading of reserves."

Mayor Loomis has requested implementation plans for each of the taxes recommended by the committee. "Before we do anything regarding additional funding for the town, there will be significant discussion by the council to make sure everyone is aware of the impact."

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