COGS Reports – Budget Review Commission Recommendations

Recommendations Related to Capital Project Management and Processes

Capital Plan Prioritization – The Commission observed significant movements of dollar amounts in project funding between budget years and we make the following recommendations:

1. 1. Prioritize projects most impactful to residents and visitors to maximize value to keep Scottsdale a prime tourist destination
   2. Consider whether the large number of managed projects impairs effectiveness of project completion efforts
   3. Designate a portion of the highly needed and impactful projects as “critical projects” and evaluate whether differing levels of attention and resources should be directed toward them

Project Cost Estimation and Project Execution “Tiger Team” Review – With respect to the project cost estimate and expenditure timing development process for budget submission, the Commission recommends establishing a “Tiger Team” to review processes and controls over key elements of the Construction Management Areas to be considered by such a cross-disciplinary team may include:

1. 1. The processes and controls over how cost estimates are being quantified, reviewed and timed with likely differing policies and controls established based on predefined criteria for types of projects (likely by size and type)
   2. Conducting a skills assessment inventory to identify gaps in expertise necessary for the review and/or execution of projects based on complexities
   3. Merger of potentially adjacent projects for efficiency
   4. Use of bonus or permitted incentives for contractor exceptional performance
   5. Using project team meetings to enhance project communication
   6. Incorporating update meetings with impacted parties/users on a project and frequency of such meetings
   7. Identifying projects meriting additional review for timing assessments, contingency amounts based on risk, etc.
   8. Using cost/benefit of independent project reviewer in finance or elsewhere

Recommendations Related to Transportation Projects and ALCP

Roads Condition and Planning – Given that road condition is key to resident satisfaction and tourism, the Commission offers the following recommendations:

1. 1. Consider generating a 20-year roads program to ensure visibility to the public of the long-term planning that is derived from already known road conditions reporting
   2. Establish goals for PCI (Pavement Condition Index) levels (possibly 75%-80%?)
   3. Direct additional funding to street maintenance until the city-wide metric of PCI returns to a goal level to maintain an attractive visitor experience in support of the critical tourism aspect of our City
   4. Prepare cost/benefit analysis for minor repairs and maintenance as in-house or contracted

More Extensive Advance Project Scoping – While project scoping can be challenging, we believe there may be benefit to more extensive scoping for large capital projects to achieve more accurate estimates of cost and timing. The Commission noticed that redefinitions of current projects resulted in costly changes so consideration should be given to more tightly defining a project where higher risks exist.

Recommendations Related to Major Operating Budget Revenues  

Grocery Tax Suspension (2 dissenting members) – Consider suspending, by Council action, the City’s 1.70% tax on groceries.

Suspension of 0.15% Preserve Sales Tax – Consider suspending, by Council action, the City’s 2004 temporary 0.15% Preserve sales tax (once all Preserve debt and other liabilities have been repaid or provided for with Preserve fund cash reserves) to ensure future taxes are not collected from citizens for no approved obligations.

Financial Sustainability Reporting to Council (one dissent, one member left and did not vote) – Consider ways to determine if the Budget aligns with the goals of financial sustainability, quality of life and promotion of tourism. Every Council agenda report should have an affirmative statement assessing the impact of the requested initiative on financial sustainability and tourism.

Recommendations Related to Operating Department Budgets

(Note: Two commission members had to leave at this time, as such only 6 members were present to vote on Items 1 through 5 and only 5 members were present to vote on item 6)

Threat Assessment on Federal Funds – Due to the current volatility and uncertainty with federal funding, particularly in the Community Services Departments, the City should maintain an ongoing Threat Assessment and procedures to ensure that the citizens’ needs met by these funds

Open FTE Position Elimination – We understand that various departments have their own processes for monitoring levels of FTEs and unfilled positions and that leadership is engaged in the matter. Given the magnitude of payroll in the city budget we recommend:

1. 1. A formalized annual review of positions, with a specific focus on those unfilled for 180 or more days, to look for synergies possible by merging functions to lower FTEs
   2. A quarterly update meeting with department heads for larger departments with unfilled positions with a focus on positions unfilled over 180 days
   3. Along with, and equally important, departments should determine if there are other functions that benefit tourists and residents that they are not doing because of staffing or funding restraints

Overtime – Since overtime represents a significant cost at certain operating units, we suggest that consideration be given to a formalized and consistent process of City Manager and Treasurer review of overtime on a quarterly basis with those departments with larger usage.

Contract Services – It is our understanding that City Staff plans to do an extensive review of areas where contract services are used that might be more cost effectively performed inhouse. Given the significant increases in planned contracted services throughout the budget, as well as the overall volume of contract services, we encourage this initiative.

Cost Recovery of City Services – The City provides various services for outside entities and has cost recovery practices that vary. We recognize that this is a complex matter since users provide various levels of contribution to the community. However, consideration should be given to the propriety of reimbursement received in various areas possibly including:

1. 1. Disclosing all unrecovered costs to Council for approval of programmatic decisions for tourism events, patrol of entertainment district, etc.
   2. Consider charging school districts more for police services; with 29 schools inside city limits it appears that even more coverage may be necessary
   3. Consider fully charging special events for the full police and fire team related efforts
   4. Consider requiring larger special events to provide insurance coverage against larger scale incidents

Supplemental Pension Funding Planned for FY2025/26 (one dissenting member) – The proposed budget currently includes a $50 million additional payment of the PSPRS unfunded liability from recently accumulated fund balances. Considering there is a high incidence of road deterioration and other deferred maintenance items on other City assets, we recommend Council review the economics of additional payment of the PSPRS unfunded liability to determine the degree to which it is the best use of accumulated fund balances and whether this amount should be lowered, increased or maintained at this planned level (the Commission did not come to a conclusion with respect to the level of additional payment). Our understanding is that at a $50 million additional payment level:

1. 1. A loss is incurred of approximately $1.5-$2.0 million relating to interest earnings no longer available to fund capital projects (3-4% interest earning rate foregone)
   2. A benefit is received of lower pension expense of approximately $4.0 million relating to the actuarial impact of additional fund assets and a 7.2% assumed rate of return
   3. We also note that the City can borrow at interest rates in the low single digits but did not have time to evaluate whether that is also a potential option.

Recommendations Related to Fund Balance And Governing Policies

 (Note: Two commission members had left at this time, as such only 5 members were present to vote on these 2 items)

Fund Balance Utilization and Reporting – Consider including a schedule in the monthly financial reporting package showing the components of the various designated fund balance elements and any changes as a regular reminder of the available amounts and their current assigned potential There were significant changes made in the FY2025/26 Proposed Budget and we recommend that all changes be highlighted to Council when the budget is presented to them.

We further note:

• The portion of fund balance designated for additional paydown of PSPRS pension unfunded liability was reduced by $102.9million from 129.5million to $26.6million. Of that reduction $50.0million relates to the proposed FY2025/26 additional paydown and the remaining $52.9million relates to transfers to other fund balance designations including proposed new designations for FY2025/26
• New categories of designated funding were created in part as an outcome of Commission discussions which should be highlighted to Council
• The Commission was not able to review the propriety of the proposed fund balance designations but understands that certain portions relate to desired amounts supporting bond rating metrics

Developer Obligations

Consider reviewing and updating the City policy/policies with respect to developer payments from “The overall community GOAL is to have new development pay for itself” to ” the community REǪUIREMENT is that new development must pay for itself”.