Mesa takes heat over record $580 million bond request

AZ Central
Thursday, October 23, 2014
Maria Polletta,

As the largest city in the country without a primary property tax, Mesa makes up for it by charging its utility customers higher fees to help cover day-to-day expenses.

And while Mesa residents have some of the biggest utility bills in the Valley as a result, city leaders say it's not enough.

Since the Great Recession, the cash-strapped city has been putting off maintenance and repairs, and it needs to provide new infrastructure in its rapidly growing southeastern region.

Officials are now asking voters to approve one of the largest bond issues in Valley history, at more than half a billion dollars. Critics say the hefty request could've been avoided if the city didn't use utility money for non-utility expenses.

Though Mesa voters, with few exceptions, have overwhelmingly supported city bond issues, this one may not be a sure thing.

Priorities questioned

More than a dozen people have filed a ballot argument against the November bond package, saying Mesa needs to change the way it manages its money before asking voters to go another $580 million into debt.

"We agree that these infrastructure improvements are important and necessary," the residents write. But they argue the city's spending priorities are "misplaced" and say financial practices should be "closely examined before supporting more bonds."

Mesa's decades-long practice of using utility funds — collectively known as an enterprise fund — to help pay for general operations is uncommon in the rest of the Valley.
"I feel that taking these funds from the enterprise fund and using them for various city operations is not proper," Mesa resident Gene Dufoe said at a recent City Council meeting. "I feel that we're not using the profits from the enterprise fund to responsibly maintain the infrastructure required by the enterprise-fund operations."

Arizona Tax Research Association President and public-finance expert Kevin McCarthy backed some of the residents' complaints in interviews with The Arizona Republic.

If Mesa's utility revenue had been reinvested in water and other utility departments, the city could have saved up for the needed projects detailed in the bond request, according to McCarthy.

He said it "should be obvious to anybody" that "over a five-year period of time, the amount that they need for the bonds is in the neighborhood of what they transferred" to cover general operations.

ALLHANDS: Strap in, Mesa, for the financial roller-coaster

While Mesa's longstanding system of using utility funds is perfectly legal, McCarthy said it's less transparent "than a property-tax increase or sales-tax increase, where elected officials know there's going to be opposition."

In Glendale, where leaders used utility revenue to cover expenses related to their fight to keep the Arizona Coyotes hockey franchise at the city-owned arena, the city set up a repayment plan.

A 'strategic decision'

Mesa leaders say the city's bond request is unrelated to how it manages utility revenue.

They say Mesa historically has turned to bonds to finance sizable capital projects, many of which were put off during the recession to avoid straining residents' pocketbooks.

Now, the city says it can no longer hold off on a new $189million water-treatment plant and $104million wastewater-treatment plant expansion in southeast Mesa, among other projects. The revenue bonds would be repaid by utility users, and City Manager Chris Brady said the city would be "very careful" to not sell individual bonds before they're needed.

City officials have been candid about relying on utility revenue to help cover everyday city expenses — a policy that dates back to 1945 — as well as the practice's effect on utility rates.

"(That was) a strategic decision, that we were going to finance the city operations through revenues from utilities rather than primary property taxes," Mesa Mayor John Giles said. "So, those who come in and say, 'Wait a minute. Look. You're doing creative financing by moving money out of your utility accounts and your enterprise funds to cover general obligations.' Well, yeah. That's how we do things around here, and this was not done behind closed doors."

Candace Cannistraro, Mesa's management and budget director, agreed the policy is "not a secret."

"We say, 'Yes, we make money on the utilities. They're paying for your police officers, your firefighters, your court,'" she said.

It's probably not surprising, then, that Mesa's average utility bills were priciest when compared to those of Glendale, Phoenix, Tempe, Scottsdale, Gilbert and Chandler in July.

While Glendale and Phoenix were only a few dollars behind Mesa's $97.38 average monthly bill, Chandler's and Gilbert's were about $30 cheaper.

Still, the same 2014 average-homeowner cost comparison put Mesa on the cheaper end of the spectrum overall, after considering what residents pay in sales taxes, property taxes and utility fees. It was the third-cheapest city, after Gilbert and Chandler.

Property tax a non-starter?

Mesa leaders say residents are unwilling to scrimp on the city services that utility bills help cover, and the city has to pay for them somehow.

Mesa voters rejected a proposed primary property tax in 2006, agreeing to a secondary property tax in 2008 only to cover bond debt.

Councilmen Scott Somers and Dennis Kavanaugh have advocated for a primary property tax dedicated to funding public-safety services, though the city manager said he wasn't sure how feasible such a move would be.

"We now transfer way more out of (the enterprise fund) than some of our founding fathers back in 1945 ever envisioned," Somers said, adding that sales-tax revenue has become increasingly volatile as well.

Both councilmen said the addition of a primary property tax would create a more stable portfolio of revenue sources for the city.

"Right now, we get hit first and harder than other communities do," Kavanaugh said. "If people want to be on that roller coaster, fine, but at some point in time, it's going to be like, 'Enough of this amusement ride.'"

The mayor said the issue is a non-starter, however.

"The voters of Mesa are not going to amend the city charter to impose a primary property tax. We've learned that lesson a few times," Giles said. "(In the meantime), I think everyone realizes the system we've got now is actually a good one."

Even Tracy Langston, part of the group of Mesa residents arguing against the November bond package, isn't lobbying for a primary property tax.

"We have survived for a long time without (one)," Langston said. "What we're concerned about is a lack of the detailed oversight needed to know that the money (already received by the city) is being used as efficiently as possible."

The city this fiscal year expects to use nearly a third of its utility revenue, $95.7 million, for non-utility operations such as police and fire.