Focus on Finance: A Metropolis in the Desert

Neal Young is currently Senior Executive Assistant to the City Manager of Phoenix. He has previously served as the Interim Public Transit Director, Assistant Water Services Director, and Assistant Housing Director for the City of Phoenix. He has also served as the Director of the Arizona Department of Economic Security and the Assistant Director of the City of Phoenix Housing and Human Services Department.

The US Conference of Mayors and the Arizona Office of Employment and Population Statistics both predicted over 2.5 percent employment growth in Phoenix next year, and Forbes had you as America’s seventh fastest growing city. How do you balance your goals of sustainability in Phoenix while still trying to facilitate the city’s growth?

Phoenix has an overarching goal of becoming the most sustainable desert city. Under that goal, a number of sustainability targets have been developed including a renewable energy goal of 15 percent by 2025, greenhouse gas reduction of five percent from 2,005 levels by 2015, increase our energy efficiency by 20 percent by 2020, and 40 percent waste diversion from our landfills by 2020. We have one of the largest green fleets in the country both in our public works vehicles and our bus fleet. Job and population growth can impact us achieving our goals, but I am confident that we can provide the necessary services and infrastructure to citizens while continuing to improve our sustainability. Like all cities, we could really use the job growth.

In addition, we continue to develop solar energy on City rooftops and retrofit lighting, including streetlights and traffic signals with energy efficient features such as LED lighting. Phoenix is growing fast, but many people left during the recession.  Overall, we will be able easily manage the growth in both population and jobs without much stress on our infrastructure or much impact to our sustainability goals.

Obviously, the sun plays a large role in the City of Phoenix with about 85 percent of days being sunny last year. Could you describe the City of Phoenix’s residential solar power financing program, what it means to the City, and what the future of residential solar power could be in Phoenix?

The city has developed enough solar at its facilities to power over 2,800 homes. However, most solar-power incentive programs in the greater Phoenix area are managed by local utility companies.

In residential solar power, there were some very good tax subsidies, and of course excess power is purchased by the utilities. The utilities have become concerned that those who are generating solar power and selling it back to the utility are not paying for the maintenance of the grid. The Arizona Corporation Commission will be sorting this out in the years ahead.  There are some significant issues that need to be resolved around the incentives to continue to develop solar and the use and maintenance of the power grid.

You’ve also served as the Interim Director of Public Transit. Could you describe the light rail project in Phoenix and what role that plays for growth and transportation in the city?

The first 20-mile segment of light rail in the metro area is called CPEV, Central Phoenix-East Valley. This first segment cost about $1.5 billion. Since that investment, the private sector has invested about $5 billion along the light rail corridor. Light rail has improved population densities and mobility along the corridor. Ridership has grown dramatically. In fact, we are close to achieving the 20-year ridership projection after about six years of operation.

The region is working on expanding light rail with new lines under development in central and east Mesa as well as northwest Phoenix. Additional routes are also being considered in Phoenix – west to the Capitol and along Interstate 10, south Central Avenue, and further development in the northwest and northeast corridors. Many people in Phoenix want light rail as soon as we can build it. So, I think it has been a great catalyst to create jobs, improve density, investment and mobility, and increase property values. I think it has been very beneficial.

Details about the GR:D bicycle-sharing system were recently announced. What kinds of adaptations do you see the City of Phoenix making to encourage bicycle transportation? 

The City of Phoenix wants to see more multi-modal transit opportunities. We will likely see some of the bike share stations rolling out close to light rail platforms, bus transit connections, and major transit hubs. In addition, there are also new bike paths and lanes that are planned and being developed. The Streets Department manages the bike share program and is in a good position to couple the bike share program with bike path and lane expansion, the complete streets program, and improving the walkability of the city. As we go forward, I anticipate there will be more opportunities for bicycling to the extent that funding is available.

The City of Phoenix saw revenues plummet with property values in the most recent recession. After this decline in revenues, the city chose to implement big spending cuts with the smallest work force in 40 years. How did the city come to decide the levels of spending cuts and revenue increases that it did?

The city faced a $277 million deficit for the two fiscal years ending June 30, 2011. When that occurred, I was not at the city. But what I can tell you, when dealing with budget reductions, the process starts with the revenue estimate. From there, each department will submit options for various reduction targets. All of the options are evaluated and prioritized by the department. Options are then selected for inclusion in the City Manager’s Budget. City Council also weighs in. The manager then holds about 20 community budget hearings with Council members to assist in identifying citizen priorities. By the end of the process, a City Manager budget is developed, presented to and ultimately approved by the Council after much debate.

In the end, the City was able to defer some capital projects, and refund or refinance some debt. Employee unions agreed to some concessions including furloughs, wage freezes, and hiring freezes. The City Manager also started an innovation and efficiency task force utilizing both department heads and private sector members.  Those department heads and private sector members really started to scour the city looking for opportunities.

There has been some outsourcing and some new innovations. For example, we instituted same day collection of solid waste and recycling. That took trucks off the road, reduced miles to landfills, and generated savings that helped keep rates down. We’ve also increased the span of control in a lot of areas.  So far the initiative has generated about $90 million in savings.

We are currently at 10.1 employees per 1,000 people, which is the lowest in 40 years. At the same time, City services received very high marks from citizens on our customer satisfaction survey. Also, by holding vacancies, we were able to avoid most layoffs and place employees in needed positions in the organization.

Is the City more prepared for revenue fluctuations than it was four years ago?

We are heavily sales tax driven. Sales tax is collected at the state-level and shared with cities, plus our own dedicated sales tax. Sales tax becomes more volatile in times of uncertainty or economic downturn. In response to revenue fluctuations, the City has increased its contingency reserve and is focused on growing the reserve to about five percent of general fund expenditures, or about $60 million. Property taxes are a significant but smaller portion of our revenue, but assessed valuations are starting to rebound. We are as ready for fluctuations as anybody. We need to keep our eye on economic indicators and be prepared to quickly respond.

The voters approved pension reform in March, saving the City $600 million over the next 25 years. Phoenix’s City Council also approved recent changes to end pension “spiking” by City workers. Could you describe how these changes affect the overall health of your pension system?

We were one of the first cities in the country to develop a plan for GASB 68 implementation. Pension reform has created a new tier of City employee. The employees hired after July 1, 2013 will have to work longer to retire and will also share in pension cost on a 50/50 basis. In addition, pensionable vacation and sick leave payouts have been fixed for all employees. Certain allowances, paid to executives and middle managers were also eliminated from pensionable wages for current employees. The retirement board also made changes to the assumed rate of return, lowering it to 7.5 percent from eight percent. Also, a closed 25-year amortization period for the unfunded liability has been put in place. At June 30, 2013, the pension plan was 64.2 percent funded.

All of these changes have had an impact on the pension obligation – some increasing the liability and others decreasing it. However, as a result of all of the changes put in place, total savings now are estimated at $829 million over the next 25 years. So pension reform and elimination of spiking has had a significant impact on future cash flows related to the pension obligations. We still have more work to do, but we are now in a manageable situation.

Do these changes affect your ability to recruit new city employees? 

I haven’t seen any direct evidence of that, but we know that people respond to incentives. The City of Phoenix is known to be a great employer. Phoenix pays market wages. Phoenix still has a good benefit package. I think only time will tell what is going to happen as it relates to those changes. Could there be an impact? I think that is going to depend on what else is happening in the labor market and how attractive the City of Phoenix continues to be. Today we are a very competitive employer, and I am grateful to be there every day.