The City of Phoenix ended the 2024-25 fiscal year with $11.6 million more than it anticipated but faces “many fiscal challenges and competing priorities” next year, according to a new report to City Council.
“The higher than anticipated ending fund balance is good news and will be beneficial as we move forward,” City Manager Jeff Barton wrote.
But Barton, who retires in mid-November, said his successor and the council will “face many fiscal challenges and competing priorities” that “will require strategic and difficult decisions to ensure the budget remains sustainable and balanced.”
The city had initially projected $2.158 billion in revenue but realized a bump from sales tax income.
Barton is proposing that $1.6 million be allocated to the city’s Housing Trust Fund “to further invest in affordable housing initiatives,” bringing its total allotment for the year to $5.2 million.
He said the rest of the surplus will be placed in reserves as the administration begins the months-long process of creating a spending plan for the fiscal year beginning next July 1.
And that plan will have to account for a number of challenges, including “impacts from the federal administration and the One Big Beautiful Bill Act,” the report states.
Barton noted that new income and business tax cuts that take effect next year and the cancellation of some federal grants the city had been counting on are among those impacts.
Stating the tax cuts would cost Phoenix $56.7 million cumulatively over the next three fiscal years, Barton said the city already is losing a $12.9 million grant for “low carbon transportation materials” and another $15 million grant for electric vehicle charging infrastructure.
“Additionally, the (city) Public Transit Department has indicated delays in grant application reviews, projects and reimbursement requests due to the reductions in staffing at the Federal Transit Administration,” he said.
But federal actions aren’t the only pressure points on the city’s finances.
Union contracts expire next June and labor negotiations will started before the end of this year.
While he gave no indication on the cost impact, Barton reminded that a multi-year job classification compensation study Council approved in 2023 “moved the City closer to its goal of becoming Arizona’s premier public sector employer.
“The city began the C&C study to not only ensure job classifications and pay structures are aligned with the local municipal market but to also make the city’s pay ranges competitive in the local market. Setting those pay ranges demonstrates the value the city places on its employees and the community they serve.”
The city also need sot brace for added expense in addressing rampant homelessness and it faces “additional unfunded needs” as a result of the loss of federal pandemic relief funding.
Any remaining funds from the COVID era are being spent this year, leaving the city with a $22 million hole.
“Funding is necessary to maintain operational support at several sites the City opened over the last three years in an effort to increase shelter capacity in our homeless services systems,” Barton wrote.
In addition, the $500 million General Obligation Bond that voters approved in 2023 funded numerous new facilities ranging from fire stations to splash pads that now need money to operate.
Those operational costs will cost an additional $11.7 million in the coming fiscal year and triple by 2028-29.
There also are another dozen items that “add significant pressure and uncertainty to the General Fund operating budget” that incoming City Manager Ed Zuercher and his aides will have to manage after Barton leaves.
Leading that list are “economic uncertainty and volatility from tariffs, trade policy, federal reserve actions, geopolitical concerns, housing affordability, and overall consumer confidence.”
In addition, rising employee benefit costs – particularly Public Safety pension obligations and health care insurance – loom over budget preparations for next year, Barton said.
“It is important to mention that Phoenix’s public safety pension costs will continue to increase for the foreseeable future based on information staff received from the Public Safety Personnel Retirement System (PSPRS) actuary,” Barton said.
Annual pension costs for police officers are currently estimated at $200 million and projected to rise to $250 million by the end of the decade. Likewise, firefighter pension costs are expected to climb from about $125 million annually to $150 million in that time frame.
Those estimates are on top of about $4.5 billion in Phoenix still owes the state Public Safety Personnel Retirement System in unfunded pension liability.
Inflation also remains a problem as the city tries to figure not only the construction cost of repairing major facilities but also replacing aging vehicles and “critical IT infrastructure and systems.”
Adding to the city’s budget planning are concerns about over “potential reduction in state and federal funding or new unfunded state or federal mandates, including environmental requirements and attempts by the Legislature to further reduce revenues,” Barton warned.
The city administration’s next major word on finances won’t come until February, when it releases a preliminary report on 2026-27 spending and revenue projections along with a multi-year General Fund forecast.
That forecast earlier this year showed the city faces a deficit of between $64 million and $102 million in 2026-27.
A trial budget will be submitted to the council on March 24, and, following hearings, a proposed budget will be announced May 5 with Council making a decision two weeks later.