Finance staff warn of tightening capital fund, highways needs in five‑year forecast

Oro Valley staff told the Town Council on March 5 that recent declines and volatility in state shared revenues and flat local sales tax growth are squeezing the town’s ability to fund capital projects over the next five years.

Deputy Finance Director Wendy Gomez presented the fiscal year to date (through December 2024) quarterly update, noting general fund revenues at about 47% of budget and a 4% drop in local sales tax compared with the prior year. "Local sales tax is down about 4% — roughly $500,000 — driven largely by a slowdown in construction sales tax," Gomez said.

Gomez said overall the general fund is still expected to end the fiscal year near budget. Staff estimated personnel savings of about $970,000 so far and projected a year‑end general fund balance just under $19.6 million, "which exceeds council's 30% reserve policy by about $4.3 million," she said.

Gephart outlined the five‑year forecast and cautioned that the capital fund faces the most significant pressure. "State shared revenues declined this year and are not expected to fully recover to fiscal year 2024 levels until fiscal year 2029," Chief Financial Officer Scott Gephart told council. That reduction, combined with modest assumed sales tax growth, contributes to a projected decline in capital fund balances; the forecast shows the capital fund turning negative late in the five‑year horizon.

Key figures and drivers

- General fund: FY2024 actual general fund revenues were $59.2 million; staff forecast FY2025 revenues at about $57.1 million (a $2.2 million, or 3.7% decline). - Personnel and operations: Forecast assumes modest employee growth and step/merit increases; personnel costs projected to grow ~16% and O&M ~23% over five years without offsetting revenue increases. - Capital and highways: Highway fund capital needs and road overlay projects exceed projected highway revenues; staff expects transfers in from other funds totaling roughly $13 million over the next five years to keep the highway fund positive. Pavement preservation needs were estimated at about $3.0–3.2 million per year in coming years. - Capital fund outlook: With current assumptions the capital fund could show a negative balance approaching about $900,000 by fiscal year 2030, according to the forecast.

Council questions and context

Vice Mayor Barrett pressed staff for context on the state shared revenue changes; staff explained a one‑time bump in prior years tied to rate changes and an allocation increase that temporarily boosted receipts, and that the town is now seeing the expected decline. Councilmember Nicholson asked about recession risk; staff said the forecast assumes no recession but acknowledged economic variables could alter projections.

Gephart said the forecast is a baseline and that alternative fiscal scenarios remain under development; he noted the town has limited dedicated capital revenue sources and that transfers from the general fund have historically supported capital needs. He also said staff included a $5 million assumed cash contribution for a potential police facility in fiscal year 2027 in the forecast but did not show associated debt issuance.

What comes next

Staff presented the forecast earlier than in prior years to inform upcoming budget preparations and said alternative scenarios will be brought forward as the budget process proceeds. Council members raised the option of adjusting the 30% reserve policy to 25% to free one‑time funds for capital, but staff cautioned that lowering the reserve is a one‑time solution and would not close the structural gap between recurring revenues and recurring expenditures.

The town will use the forecast to guide the FY2026 budget development and return with more detailed options and scenario analyses.