Municipal CFO Series: Jeff DeWitt, Phoenix

Jeff DeWitt is the CFO for the City of Phoenix. He has over 23 years of municipal finance experience that includes the issuance of nearly $8.0 billion in bonds for various city projects. His responsibilities for the City include debt and investments, financial reporting, tax administration, payroll, procurement, real estate, risk management and enterprise-wide financial systems.

How has the City of Phoenix dealt with dwindling tax revenues during the recession? Has the focus been on raising taxes, cutting public sector employment and services, or a mix of both?

In January 2010 Phoenix faced a $277 million shortfall on just over a billion dollar general fund budget. The shortfall was largely due to dramatic drops in both excise and property tax revenues. The shortfall was addressed through budget or program reductions of approximately $139 million, a 2.0 percent tax on food for home consumption, restructuring of debt, pay reductions for all employee unions of 3.2 percent, and innovation and efficiency savings. By acting six months before the FY 2010-11 fiscal years, savings were realized early that further reduced the impact. For FY 2012-13, the city had achieved a structurally balanced budget, increased its reserves, and added $6 million in new programs back to the general fund budget. The number of city employees has been reduced from approximately 17,500 to 15,000 and on a per capita basis is now the smallest since 1970. The city was able to maintain its AAA S&P bond ratings during this period.

Arizona voters just passed Proposition 117, capping annual property tax hikes at 5 percent per year. How will this impact Phoenix’s finances, and do you think property tax caps make sense for a city or state?

Phoenix had an unprecedented hit in assessed valuation, dropping by more than 40 percent from the peak in 2006-07. A cap on property tax growth after such a large drop will have negative impacts on the taxable base for infrastructure needs for the state, particularly local governments and school districts. The law does not limit the tax rate. Simply put, the amount taxed is the assessed valuation times the tax rate. By limiting the assessed valuation growth, tax rates will have to be set artificially high to achieve the necessary property tax levies (tax revenues).

The legislation was a response to a California Proposition Thirteen-type push against tax rates that have risen as governments and school districts adjust rates to collect the same revenues as before the drop in values to pay debt service and other expenses. The new law does not achieve that goal but will result in rates that will be higher than necessary given artificially constrained assessed valuations. The lower assessed valuation will impact future bond programs that could have been funded by assessed valuation growth without raising tax rates.

Phoenix utilizes performance based budgeting (PFBB). Could you walk through the structure of the particular model of PFBB that Phoenix uses? How has PFBB improved city services and finances?

For the current year, the FY 2012-13 budget, the city used a zero-based budgeting approach that provides in-depth details on all programs, including staffing assigned to each area. The new budget process provides for more transparency and gives each department more information to review to determine if outsourcing a service may be more appropriate.

The process requires a lot of staff time and quality to be useful. I would strongly recommend some type of program inventory be developed to examine staffing and cost associated with each program.

Can you discuss Phoenix’s “Buy Local” policy? What have the results been thus far?

This program was adopted by the City Council, effective July 1, 2012, to require all general goods and services contracts under $50,000 be bid only to businesses in Maricopa County. This required implementing a new vendor registration system, which went into effect on April 1, 2012. The program has resulted in four times more contracts to local businesses in the “set aside” category for the first quarter of FY 2012-13 than in the prior year, and over thirty-five hundred local businesses have registered in the new vendor management system.

Do you think it makes more sense fiscally to offer public sector workers higher present salaries and less generous pensions? Or do you feel generously defined benefit pensions are critical for attracting talent to the city workforce?

The City Council has approved pension reform for the March 13, 2013, ballot. Most of the pension provisions are in City Charter and require a vote of the public to change. The following changes are projected to reduce the cost to the city by $600 million over twenty-five years:

• Require new employees to meet Rule of Eighty-Seven (age plus years of service) to retire. (Current employees are Rule of Eighty.)

• Require all new employees to contribute 50 percent of the annual pension cost. Currently the employees are capped at 5 percent of payroll, which is about 20 percent of the annual pension cost.

• Allow the city to contribute more than the actuarial required contribution (ARC). Currently City Charter requires the city to pay the full ARC, but more cannot be contributed to pay down any unfunded liabilities.

A comprehensive pay and benefit study completed in early 2012 found that, on average, Phoenix employees made about 19 percent less than their private sector counterparts in salary, but, when pension and other benefits were considered, total compensation was at market pay. Some job classes were above and below market and are going to the City Council in early 2013 to be adjusted. Traditionally, government employees focus more on job security and benefits that have attracted high quality employees to the City of Phoenix. In the current environment total compensation is what matters.