Mesa has a $30 million-plus budget gap. How the city plans to close it

MARK BRODIE: In 2024, renters in Arizona got a little bit of a break when the governor signed a bill that repealed a tax on their monthly rent.

But, when it was passed, cities around the state and the Arizona League of Cities and Towns, which lobbies for them, warned it would mean a major hit to cities’ budgets.

And now, we’re seeing those numbers roll in. Tempe announced a $24 million hole in its budget left largely by the repeal of the rental tax. The city is now eyeing a sales tax increase.

In Mesa, the Valley’s largest suburb, that deficit is up to $36 million. Mesa City Manager Scott Butler told The Show more about it — and what his city is doing to fill the gap.

Full conversation

SCOTT BUTLER: The city’s looking at about a $30-$36 million deficit for this coming year.

LAUREN GILGER: Wow, yeah.

SCOTT BUTLER: Fortunately, we’ve been able to have reserve funds that we can use to cover this and and in our five-year forecast, we’re back into the black in a few years, but it’s because we’ve had to tighten our belts and we’ve had to cut programs and look for efficiencies to save money within the organization.

And it’s been frustrating, I think, for our elected officials and our staff and our residents, too, because this wasn’t something of our own making. This wasn’t city overspending, financial mismanagement. This was literally things that were done to us by the mostly by the state and federal government that had a ripple effect throughout our budget.

LAUREN GILGER: Right. And those ripple effects are being felt, I think, across the state in in various cities. Is this just because of the repeal of the residential rental tax or is this more than that?

SCOTT BUTLER: It it’s more than that, Lauren. We really, as we talk about in around the community, it has been the perfect storm that we’ve seen. The residential rental repeal represented about $20 million a year to ongoing revenue, but the implementation of the state flat tax was about $6 million a year, the incorporation of San Tan Valley, which we think was a good thing — but as a city now, they’re able to get a portion of shared revenue, which lowers everyone else’s, because it’s one pie and now it’s sliced a few different ways — and that was a $3 million a year impact to the city of Mesa ongoing.

And so, when you add all that up, that’s what leads us to where we are today. The biggest of which, as you alluded to though, was the residential rental repeal.

LAUREN GILGER: Yeah, $20 million in itself there. OK, So, as I said, cities across the Valley are facing deficits because of this repeal. The League of Cities and Towns at the time when this was passed sort of said this was going to happen. Cities all across the Valley said this is going to happen.

Are you frustrated that it happened anyway?

SCOTT BUTLER: We are. We know the proponents of the repeal were really talking about housing affordability, and and that’s a real problem, of course. I mean, we’re all grappling with the ripple effects of what high housing costs have throughout the economy and and throughout our residents.

But the the real issue is though that this doesn’t even really move the needle in that case. And the the proponents wanted to characterize this that you repeal the residential rental tax, great, everyone will be all apartments, all multi-family will be more affordable, or residential single-family homes are going to be more affordable, and that’s just not the case.

The League and and the individual cities said all along, you’re not going to get the desired result, you’re not going to have a dramatic impact on housing affordability in this region, while at the same time, you’re going to really limit the services and opportunities that cities have with very limited other resources to come back in and backfill that money.

And that’s certainly the situation in Mesa. We don’t have a primary property tax, we don’t have a tax on food, so losing $20 million a year from the residential rental tax really backed us into a corner without different levers to pull. We’re, we’re really having to tighten our belt and look for savings, but that has meant um eliminating programs, slashing programs, finding those efficiencies because that’s really the the hand we were dealt.

LAUREN GILGER: And and I want to talk about what those programs are in just a moment. But I mean, is this sort of a piece of a bigger pie? What is the challenge with affordable housing, particularly in Mesa, where I know there is a very diverse population, lots of low-income renters there.

And yeah, like you said, the idea here was to sort of give renters a break in a in a high inflation economy and an economy where a lot of people are paying much more in rent than they used to be in. These were costs that were generally passed on to the renter.

You say you don’t think that this will end up helping them, but, you know, what might?

SCOTT BUTLER: Well, I mean, if we can crack that mystery of what’s going to be the real root of housing affordability in this state, Lauren, you and I, we’d be millionaires after this, right?

LAUREN GILGER: Complicated problem. But is this one small piece of a bigger pie? Like, can you chip away at this and help people out a little bit here and there?

SCOTT BUTLER: Yeah, I think it is, and that’s what the proponents said, and I don’t disagree. Did renters see some short-term relief from this? I’m sure most renters did.

It also seems that multi-family reached a saturation point where they were talking about we overbuilt the market over the last few years, and that has brought prices down, rental rates down as well, which is all good because that means our residents are able to have a more affordable option.

But it is a trade-off because these are these are dollars that were going to essential city services, and every community, not just Mesa, still has to provide for all of this new growth and those new residents add a burden to the system. And and that is something that you have to balance out, that we need people, as new residents move into a community and they have an impact on public safety, and they have an impact on our parks, someone’s got to pay for that.

So that’s the trade-off that the League and other cities were telling the Legislature that these these new residents, it might be more affordable, but at the same time, it’s putting an additional burden on our services.

LAUREN GILGER: Are those programs that you mentioned had to be cut because of this, are those programs that might have helped people on the low-income end of the spectrum in some ways?

SCOTT BUTLER: Yeah, I think so. When, when we look at the different programs, and they differ throughout our entire organization because the last three years, with, with all of these different revenue sources being taken away, we asked each of our departments to do 2% budget cuts each of the last three fiscal years. And that added up to over $56 million in programs and savings that were experienced by the general fund.

But you’re right, those were community service programs, those were fire prevention programs, you name it. Across the spectrum of all the services that the city provided, we had to make some tough choices about what were nice to haves and what were need to have.

And and, of course, essential services, public safety, we didn’t put anything in jeopardy, but that means a lot of the programs that help those most vulnerable in our community were also subject to the elimination of these programs.

LAUREN GILGER: Yeah, so you said five years out, this is looking more sustainable, but this is not like money that’s coming back, I would assume. How do you make that happen?

SCOTT BUTLER: Sure, just natural growth and inflation that we see and the revenue that the city experiences, and so we’ve just allowed the natural growth that we see over new residents coming in, more shopping, more sales tax, consumption will grow us out of this hole.

The problem we run into is that just gets us back to level. But we’re still experiencing rapid growth, as most cities are in the Valley, we’re still adding thousands of residents a year who need services. And that’s going to be our big challenge moving forward, and that’s where we’re going to have to have some tough discussions in the future about do we need additional revenue and what would that look like?

LAUREN GILGER: Right. So, I mean, additional revenue in city speak, right? Like, this is, you’re talking about maybe a sales tax. I know Tempe is considering that. What else can you do other than tax people a little bit more here and there?

SCOTT BUTLER: And and that might be the reality of what we face. We’re not entertaining that this year. And and I think it’s really important that we’re demonstrating to our residents and to to all of our taxpayers that we are doing everything we can to tighten our belts and be efficient.

And I think we will have that credibility if and when we need to go to our voters to say we need additional revenue. They will see that the first option wasn’t just to ask for more revenue. We actually really did do everything we can to tighten our belts.

LAUREN GILGER: All right. Scott Butler, Mesa city manager, joining us. Appreciate you coming in.

SCOTT BUTLER: Yeah, Lauren, great to talk to you today. Thank you for having me.

KJZZ's The Show transcripts are created on deadline. This text is edited for length and clarity, and may not be in its final form. The authoritative record of KJZZ's programming is the audio record.

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