Budget talks for fiscal 2011 have begun in Oro Valley.

The town council plans to accept a fiscal 2010 budget review with projections through the next fiscal year at its Sept. 16 meeting.

"That's what this is," said Oro Valley Finance Director Stacey Lemos. "This puts the fiscal year 2010-2011 on everyone's radar early."

Town officials want to get the jump on the budget this time around even as resentment lingers over budget cuts and proposed layoffs that dominated talks during the fiscal 2010 plan, which wrapped up in June.

The budget report estimates a $1.2 million deficit by the end of the fiscal year and a $1.4 million shortfall in the next.

"We've got it at what I'd call a manageable level," Town Manager David Andrews said. He said the town would be able to balance the budget by the end of the fiscal year.

Added to local concerns, estimates out of the state capital indicate Oro Valley and communities across Arizona can expect to receive less money from the state.

The potential for a drop in state-shared revenue poses an especially difficult budget scenario for Oro Valley. Because the town doesn't collect property taxes, nearly three-quarters of its revenue comes from the various state funds. What few local sources of income the town has — user fees, impact fees and local sales taxes — have all been on the decline, with further descents forecast.

In the past, growth was the major local revenue stream for the town. Now, with building at a standstill across the region and Oro Valley at near build out, that source of cash has diminished. Town officials estimate this year will see about 60 new single-family home building permits issued, and about 75 next year. The figures compare to the more than 500 new homes built per year in the early 2000s.

The forecasted drops in state support don't tell the whole story from the legislature. Municipal leaders across the state have been bracing for the possibility that state legislators would snatch money from state-shared revenue funds instead of disbursing it to local governments. The legislature did exactly that last year with agriculture funds, a move that was successfully thwarted through legal actions filed by fund recipients.

Earlier this year, the legislature took money out of state parks and heritage grant funds to pay its own bills. A move has also been under way to place a moratorium on local impact fees and possibly raid those funds as well, leaving local governments with little money to pay for the infrastructure that new development necessitates.

At the recent Arizona League of Cities and Towns annual convention, held in Oro Valley, State Treasurer Dean Martin told a group of municipal leaders the state possibly could issue state-shared-revenue IOUs to local governments instead of cash as a way to help balance the still-pending Arizona budget.

"We can't pay our bills with IOUs," Lemos said.

The state of California made a similar move earlier this year. When facing a more than $26 billion budget shortfall, state leaders began to pay its creditors and vendors with IOUs that later would mature, yielding holders as much as 3.75 percent interest.

By some estimates, interest payments on the IOUs would cost California taxpayers nearly $10 million.

Closer to home, Pima County has been facing budget issues of its own.

County officials earlier this year predicted a five-year period of declining revenue. County Administrator Chuck Huckelberry, in an April memo to the board of supervisors, said primary property tax assessments could dip by more than 6 percent, while secondary taxes could fall 14 percent.

By way of comparison, Huckelberry wrote, during the aftermath of the savings and loans scandal in the 1990s, the primary property tax assessments fell 1.4 percent and secondary 4.2 percent.

"Hence, we may face unprecedented fiscal pressure in the years ahead," Huckelberry wrote.

The county administrator also warned of a period of impending declines in state-shared revenue.  The county's share of statewide sales tax revenues peaked in fiscal 2007 at $107 million. Since then, Pima's share has fallen to $88.9 million this year. Huckelberry estimates the county won't begin to reach fiscal 2007 levels again until the 2014 budget year.

Pima County Supervisor Ann Day agreed with Huckelberry's assessment, but scolded him for offering no options to head off the impending pressures.

"Chuck Huckelberry put out a forecast, but he has no plan to contend with it," Day said.

Day did credit the county administrator for raising the possibility of departmental consolidations in human resources, procurement and about 30 other county departments. The plan would trim as many as 400 jobs, Day said, but she noted the benefits wouldn't be realized for another year at least. The board of supervisors has not yet moved on the consolidation plan.

"In essence, we need to restructure county government," Day said.

In the meantime, local elected officials would find themselves in the difficult position of imposing tax increases, laying off municipal workers or slashing government services to make ends meet.

"You have two choices, you either cut spending or raise taxes," Day said, adding that the latter would be the "worst" option during a poor economy.

Oro Valley's budget review recommends that the council consider maintaining the current hiring freeze through the next budget year.

"We feel that the volunteer reduction-in-force program was a success," Andrews said.

There are potential sources of revenue for Oro Valley. Next year, a tax-sharing deal Oro Valley has with the Hilton El Conquistador expires. If the council chooses to not renew the agreement, the town could gain about $200,000.

Also, two new hotels are slated for construction in the town next year. Those projects would yield much-needed impact fees and bed taxes.

And, while it has vacancies, Oro Valley Marketplace will have been generating sales for the entire budget year.

If the Arizona Supreme Court finds for the plaintiffs in the impending Turken v. Gordon case, tax-sharing deals like those Oro Valley has with the Hilton and Oro Valley Marketplace developer Vestar could be deemed illegal. If the court voids such agreements, the town would see an additional $1.1 million in sales and bed taxes.

"We're still in for a tight budget for sure," Andrews said.

Oro Valley deficit forecast

$1.2 million     estimated general fund deficit

$35,000 estimated highway fund deficit

$100,484 estimated bed tax deficit

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