City finance staff on Friday briefed the Flagstaff City Council on revenue trends that have softened early in the fiscal year and proposed cautious changes to the city’s recession plan.

The city’s revenue presenter said general-fund sales-tax receipts ended FY24–25 roughly $225,000 above adopted estimates, but early FY25–26 data show weakness in hotel and short-term-rental receipts and lower use-tax collections — categories that historically drive volatility. “We ended about $225,000 above our estimates for sales tax,” the presenter said, and later flagged a current-year projection shortfall across major categories of roughly $921,000, or about 1.2% of the city’s budgeted revenues.

Why it matters: sales taxes and lodging-related collections feed multiple restricted funds and the BBB tourism tax; declines in those lines reduce money available for core services and one-time programs. Staff warned the city faces additional headwinds from two external shocks: the San Tan Valley annexation and provisions in the new federal budget that could reduce state-shared income tax distributions.

On the annexation, staff estimated an immediate hit to Flagstaff’s state-shared distributions of about $123,000 in the current year and larger multi-year impacts (roughly $266,000 and more in subsequent years), because the state’s population-based sharing formula will include the newly annexed 100,000 residents. On federal tax changes, staff said the impact is delayed — based on how and when tax conformity is adopted at the state level — and could depress state-shared income-tax payments by a figure staff described in planning as “nearly $1,000,000” across coming budget years.

To guard against overreacting to short-term volatility, staff recommended adjusting the city’s recession-plan thresholds so minor, transitory dips do not trigger organization-wide cuts. Specifically, the first alert range would move from a very narrow trigger to a 2–3% decline band; moderate (3–5%) and significant (5–10%) thresholds would remain in place. Staff emphasized that decisions about hiring freezes or deeper service impacts would remain fund-by-fund and that the city would prioritize essential public-safety positions if constraints tighten.

Council members asked staff to clarify which positions would be exempt from hiring freezes and how reserves would be used. Finance staff said the city budgets reserves around 25% of the general fund and would avoid drawing below best-practice levels; staff described a lower limit near 10% as the practical boundary for reserve use in extreme scenarios.

What’s next: staff will refine dollar estimates and bring updated projections in the February retreat; any formal shifts to the recession plan or to hiring policy would be returned to council for direction before implementation.