Independent Auditor Says Oro Valley Faces No Immediate Financial Difficulties

Audit report looked T town's financial condition
Assertions by some that the Town is operating in a fiscally irresponsible manner or facing financial trouble are not supported by the audit record. Over the past eight years, including the most recent audit, the town's independent auditors has consistently issued clean "going concern" opinions. They have not identified any condition suggesting financial distress. 

Foresees no immediate cause for concern

The Town’s independent auditor, Brian Hemmerle of the audit firm of Baker Tilly LLP, presented the results of Oro Valley’s fiscal year 2024–25 audit to the Town Council and earlier to the Budget and Finance Commission.  The audit addressed whether there are conditions that could impair the Town’s ability to continue operating and meeting its obligations. Hemmerle found no such conditions. 

While the audit does not predict long-term policy outcomes, the auditor identified no financial difficulties or financial problems facing the Town in the immediate future.

Rumors of future financial problems are based on a long-term forecast and not on audit findings
The only forward-looking concern that has been raised comes from a five financial forecast prepared by the Town’s finance staff, which showed a potential revenue shortfall of four years from now. That forecast formed the basis for a staff request that the Town Council consider new taxes, proposals that the Council ultimately rejected.  Financial forecasts are inherently sensitive to assumptions and are not audit findings. In addition, the further out the projection, the less likely it is to occur. To date, nothing in the Town’s audited financial results or the opinion of the town outside auditor indicates current or near-term financial trouble.

The audit affirmed that the town is on solid financial footing, spending well below its expenditure limit and...
As part of the audit, the auditor also reviewed the Town’s compliance with Arizona’s voter-approved expenditure limitation. He reported that Oro Valley remained well below its authorized spending limit for the fiscal year, meaning the Town did not approach or exceed the legal cap on expenditures. In addition, the auditor stated that he identified no conditions or events that would raise substantial doubt about the Town’s ability to meet its obligations and continue operating as required over the applicable look-ahead period. Together, these findings indicate that the Town not only complied with its legal spending limits but also demonstrated the financial capacity to meet its ongoing commitments.

...with strong reserves

The audited financial report also shows that the Town ended the fiscal year with a General Fund balance of $20.7 million, equal to about 39 percent of annual General Fund expenditures. This reserve level is well above the Town Council’s adopted policy threshold of 25 percent. While auditors do not set or evaluate reserve policy, they do verify that reported balances are accurate and available. The absence of any audit findings or concerns related to reserves indicates that the Town’s General Fund balance is correctly reported and provides a substantial financial cushion to manage revenue fluctuations, unexpected costs, or economic uncertainty.

A "Clean Opinion: " The financial results as reported can be relied upon

Hemmerle reported that the Town received an unmodified, or “clean,” audit opinion. This opinion confirms that the Town’s financial results are accurately reported, free of material misstatement, and prepared in accordance with required accounting standards. The audit does not evaluate policy choices or future decisions, but it does confirm that the numbers relied upon by residents, council, and outside parties are reliable.
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New Taxes not a "Silver Bullet"... Part Of A Package Of Actions For Sustained Oro Valley Fiscal Stability

Town has identified and council has considered three new taxes to cover possible future spending shortfall

In March, Oro Valley Finance Director David Gephart presented a five-year forecast of the Town’s General Fund showing that expenses are projected to exceed revenues beginning in fiscal year 2029–30. The General Fund—one of the Town’s many funds—supports day-to-day operations, capital spending, and transfers to other funds. In response to the projected financial shortfall, Town staff identified several ways to close the gap. These included implementing three new taxes already in place in nearby communities: a commercial rental tax, a use tax, and a telecommunications tax. Together, these taxes, along with long-overdue fee increases for parks and recreation programs, would close the roughly $3 million funding gap identified in the forecast. The Council approved the  Parks and Recreation fee increase in October. As reported last week, the Council is expected to vote on them at its next meeting.

 
New taxes are not a "silver bullet" but are part of a set of actions to insure financial sustainability

Though much has been said by town staff in favor of the proposed new taxes, these taxes are not a “silver bullet” for ensuring Oro Valley’s long-term financial sustainability. According to Mayor Joe Winfield, speaking at the October 15 study session on the new taxes, “We’re looking at this as one of many tools,” he said, emphasizing that the Town must continue to pursue multiple strategies to strengthen its financial position rather than relying on any single measure.  Winfield pointed to the Town’s strategic refinancing of its public safety pension debt—which has saved about $3.4 million—as an example of responsible financial management. He also cited other ongoing efforts to improve fiscal sustainability, including pursuing annexation of retail rich areas, working to reduce retail sales leakage, and supporting population growth through approved housing projects now under construction. Winfield said that all these actions together—not any single one—will help build a stronger financial foundation for the Town.

While town focuses on maintaining efficient operations

Winfield also stressed that the real solution also lies in maintaining an efficient municipal government and practicing disciplined budgeting. Finance Director David Gephart believes that the Town is running a “tight ship.” He emphasized that Oro Valley has been proactive in managing expenses and maintaining fiscal discipline. Gephart outlined several ongoing efforts to control spending, including limiting staff growth, consolidating positions where possible, and delaying or reprioritizing capital projects that are not immediately necessary. The Town is also using technology to improve efficiency, reducing reliance on outside consultants, and closely monitoring contracts and operating costs. He noted that departments have been asked to identify savings and that the Town continues to maintain healthy reserves without relying on short-term borrowing. Gephart said these measures have allowed Oro Valley to preserve high service levels even as costs increase and revenues grow more slowly, demonstrating that the Town is already “doing more with less” while continuing to strengthen its long-term financial position.

 
Impact of new taxes on businesses and tenants remains uncertain

Town staff said they do not believe the proposed new taxes would place a significant burden on residents or the business community. The only direct impact on residents would be a small increase in their cell phone bills. Regarding the commercial rental tax, Finance Director David Gephart said the effect on tenants would depend on lease terms and market conditions—some landlords might absorb part of the cost to stay competitive, while others would likely pass it through to tenants. Councilmember Nicolson initially disagreed, noting that most Oro Valley commercial centers are owned by large, out-of-state corporations that operate under strict financial models and are therefore unlikely to absorb new costs. Later in the meeting, however, Nicolson pointed out that Oro Valley’s commercial vacancy rate—about 14 percent—represents an oversupply condition that could limit a landlord’s ability to raise rents, meaning some may have to absorb at least part of the additional expense themselves.

Council decision will shape Oro Valley’s long-term financial path

Soon, the Town Council will decide whether to move forward with all or some of the proposed new taxes. The decision will determine how Oro Valley balances its budget in the years ahead—whether through new revenue sources, continued cost control, or a combination of both. Whatever the outcome, the discussion has made clear that maintaining the Town’s long-term fiscal stability will require steady attention, discipline, and a mix of strategies rather than reliance on any single solution.

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Town Staff Sees Financial Gloom....Council Sees Opportunity

Staff forecast shows budget gap by 2028 – but Council identifies unaccounted for revenue opportunities
At its October 1 study session on proposed fee increases and new taxes, the Oro Valley Town Council spent most of the evening discussing staff’s revised five-year financial forecast. The forecast projected that Town expenses would begin to outpace revenues in fiscal years 2028 or 2029, with reserves falling thereafter. Finance Director David Gephart said the revised forecast reflected recent actions such as the police MOU, the change in reserve policy, and the transfer of the half-cent sales tax from the Community Center Fund. “Despite those changes,” he told the Council, “operating expenditures are still outpacing income.” 

Staff: Drastic cuts in service levels will be needed if new taxes and increased fees are not implemented
Staff said that “drastic measures” or reductions in services could be required if new taxes and increased fees are not implemented. They explained that the forecast already includes identified cost-saving measures and reflects options now under consideration to close the projected revenue gap.

Council notes that this warning is far too harsh
Council members did not dispute the seriousness of the long-term forecast but questioned the tone of staff’s warning. Several said that presenting only a worst-case scenario could create unnecessary concern in the community. Vice Mayor Melanie Barrett said she preferred a more balanced view that also accounts for likely new revenues and economic activity. Councilmember Mary Murphy agreed, saying the Council needed “a realistic picture, not an alarm.” Others emphasized that residents expect transparency and perspective, not projections that appear designed to justify higher taxes.

Because the forecast does not consider future revenue growth scenarios
Under questioning, Gephart acknowledged that the forecast did not include revenues expected from several apartment projects now under construction, such as at the Oro Valley Marketplace, or from new retail and restaurant activity that will accompany them. It also omitted the Town’s efforts to reduce “retail leakage” — purchases by residents in neighboring communities — and initiatives to attract additional tourism and visitor spending. In addition, the forecast did not reflect the potential financial impact of future annexations the Town plans to pursue. Barrett said the omission made the forecast incomplete: “New housing and retail are coming online. Those will generate revenue that isn’t reflected here.” Murphy added that the forecast “needs to tell the whole story, not just the worst case.”

Council urges staff to include growth oppotunities in future forecasts
Several Councilmembers urged staff to expand future financial forecasts to reflect potential new revenues from development, tourism, and retail-retention efforts. They said they want to see what would happen if growth and revenue efforts perform as expected, noting that the conservative model alone doesn’t show residents the opportunities ahead. Including broader “what-if” scenarios, they said, would provide a more realistic picture of the Town’s fiscal future and help residents understand both the challenges and the prospects for continued growth.

Council presses for proof of efficient operations before raising taxes or fees
Several Councilmembers, including Barrett and Murphy, said they could not support recommending new taxes or higher fees until they were confident — and could assure residents — that the Town was operating as efficiently and effectively as possible. “We have to be sure we’ve done everything we can internally before asking residents to pay more,” Murphy said.

Staff believes that they have done that with cost-saving measures were already in place, such as limiting travel, delaying hires, and tightening project reviews. “We’ve been tightening the belt for several years,” Gephart said, pointing to about $3.7 million in savings since FY 2023. He added that public safety costs make up the largest share of the Town’s operating budget and “are not something we can touch” when looking for reductions.

Staff did not provide assumptions used in forecast...makes it impossible for anyone to analyze it

Staff did not present the assumptions that were used to build the five-year forecast. Without knowing these underlying factors — such as projected inflation, staffing levels, revenue growth rates, or economic conditions — it is difficult for the Council to analyze or validate the results. Forecasts are only as reliable as their assumptions, and understanding those inputs is essential to determine whether the model is too conservative or too optimistic. Without that transparency, neither the Council nor the public can fully assess whether the Town’s financial outlook accurately reflects likely future conditions.

Forecast not reviewed by Budget and Finance Commission

The revised five-year forecast was developed internally by Town staff and had not been reviewed by the Budget and Finance Commission before it was presented to the Council. While the Commission had previously discussed the proposed fees and tax options, it did not have an opportunity to vet the updated forecast or the assumptions behind it. Independent review by the Commission would have allowed for additional public transparency and a more thorough evaluation of the forecast’s credibility.

Next steps
Staff will continue to refine the analysis and present additional information when the Council takes up the proposed taxes and fees later this month. Those actions — including possible adoption of new use, telecommunications, and commercial-rental taxes and approval of updated parks-and-recreation and stormwater fees — are scheduled for the Council’s October 15 meeting.

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Tackling Key Challenges in Oro Valley’s Latest Five-Year Financial Forecast

Reasons for optimism

Yesterday, we discussed the town’s latest five-year financial forecast and highlighted the challenges ahead. Today, we focus on what the town can do to meet these challenges.  We think there's reason for optimism.

Returning Operating Fund reserves to historic levels would eliminate the capital fund "deficit"

The town maintains a General Fund reserve of 30% of General Fund expenditures, an increase from the previous 25% level implemented five years ago to address economic uncertainty from the pandemic. 

At the meeting Vice Mayor Barrett suggested that reducing the reserve back to 25%, which could free up approximately $2.5 million as a one-time boost for capital projects. Gephart acknowledged this benefit but warned that “it doesn’t address the long-term closing of our excess ongoing revenues over ongoing expenditures” in the general fund. However, what it does is to release funds that more than cover the shortfall of $1million in the 2030 projected balance of the capital fund. 

Bond financing would provide needed spending for major items 
Unlike last year, there was no significant discussion of bond funding for capital projects in this year's discussion. However, there were indications that bonds might be issued to finance a new police facility study next year. The town’s latest grant request status report includes a $3.8 million request from the Department of Justice - Byrne Discretionary (Law Enforcement), a fund designed to support community justice projects. The grant is pending.

The town could sell for capital projects that will not be covered by grants. This is a common use of bonding and the town's current debt service [panel above] decreases substantially by 2027.  In addition, the town's future debt service projection indicates a substantial drop in debt service funding, thus freeing up the capacity to bond future projects.

Annexing retail rich areas can improve the General Fund sales tax revenue "picture"

We have not seen a recent Town of Oro Valley annexation plan. The last one we saw was in 2021. That plan identified a number of areas that are target rich for Oro Valley. Here are a couple of areas; and we've added in one of our own.

As for the General Fund and the shortfall in sales tax revenues, move forward to annex retail rich areas for annexation. One area is the east side of Oracle north of Ina that has Guadalajara Grille and other retail already in place. A second area is to annex the retail businesses on Oracle south of Ina Road. Retail there includes Safeway and Whole Foods. 

In the longer term, focus on annexing the "New Foothills Mall".  The town considered this almost 20 years ago. The town concluded that it just wasn't a good idea at that time. That was before the La Cholla Blvd became a "highway".  Now La Cholla Blvd as a giant siphon for bringing business out of Oro Valley. That's because it's far easier for residents who live in that area to quickly get to shopping rather than traveling across town to get to Oracle Road, which is where most of the retail is  located in Oro Valley.

"Reducing retail leakage" will help too

One area on which the town is focused is finding ways to reduce “retail leakage.” That is when residents spend money outside of Oro Valley instead of supporting local businesses, leading to lost sales tax revenue that could fund town services. The town has already identified challenges such as significant retail leakage in categories like automobile dealerships, clothing stores, gasoline stations, electronic shopping, and general merchandise, with total estimated lost revenue exceeding $776 million. Some of the actions the town is considering include educating residents about the benefits of shopping locally, targeting specific audiences for year-round campaigns to promote local shopping and dining, and strategically recruiting businesses that align with local consumer demand. The next steps include setting recapture goals, aiming to reduce the leakage gap by a percentage through a combination of shopper retention efforts and attracting new businesses to meet local demand. (Source: Presentation to Town of Oro Valley Town Council by Economic Development Director Paul Melcher, 3-5-25)

Bringing focus to revenue generating touring is another avenue 

Oro Valley is conducting a Leisure and Travel Study to develop a tourism strategy after taking over destination marketing from Visit Tucson in March 2024. Initial efforts, including hiring a marketing manager and launching digital campaigns, have shown limited success, leading two major resorts to rejoin Visit Tucson independently. The study, led by CSL International and a town-appointed steering committee, aims to assess the effectiveness of current tourism investments, explore sports and arts tourism, and consider regional partnerships with nearby communities. Some residents are concerned about the study’s focus, transparency, and the town’s lack of experience in tourism management. Critics argue the strategy should prioritize generating tax revenue rather than simply increasing visitors and note that the decision to leave Visit Tucson was made without consulting key stakeholders. The study, expected to take six to eight months, will present its first update in April. (Source)

And remember

Financial forecasts are conservative planning tools rather than definitive predictions. The future is almost never what is predicted. In addition, town leadership is actively seeking alternative funding sources, including federal grants and strategic fiscal policies, to ensure continued support for essential community projects. With thoughtful planning and careful adjustments, Oro Valley can navigate these financial hurdles effectively in the years ahead.

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Oro Valley’s Latest Five-Year Financial Forecast Highlights Budget Pressures and Challenges

Challenging financial times ahead
Two weeks ago, Town Manager David Gephart presented the town's five-year financial forecast to the Town Council. Not much has changed from last year’s forecast. Both forecasts emphasize funding shortfalls beginning in fiscal year 2026-2027, primarily due to declining state-shared revenues, escalating operating and maintenance costs, and insufficient growth in gasoline tax revenues. In other words, the town will need to live within its means over the next few years or identify significant new revenue sources.

Declining state shared revenues affecting General Fund
A primary concern highlighted by Gephart is the significant decrease in state-shared revenues, largely due to Arizona’s implementation of a flat income tax rate of 2.5%. He pointed out that “state-shared revenues are not expected to fully recover to last fiscal year levels until fiscal year ’29,” creating financial strain on the General Fund and a flat revenue projection through fiscal year 2028. This reduction limits the town’s financial flexibility, particularly impacting available capital improvement funds.

Rising personnel and O&M costs increasing budget pressure
Gephart emphasized that personnel and operating and maintenance (O&M) expenses continue to rise due to inflationary pressures of approximately 3-4% annually. Despite conservative assumptions for adding new employees—only one or two new full-time equivalents per year—the expenses keep escalating. Gephart noted that “we’re in a somewhat elevated inflationary environment… versus flat revenues, [this] is causing some squeezing to happen in ongoing revenues versus ongoing expenditures,” highlighting the structural challenges in maintaining balanced budgets.

Highway Fund strained by pavement preservation demands
The Highway Fund faces increasing financial pressure due to rising pavement preservation costs, which have grown from around $2 million annually to over $3 million per year. Gephart explained that while gas tax revenues remain steady, they are insufficient to cover the surge in roadway maintenance and capital outlay, necessitating significant transfers from other town funds. He warned that the town faces “a pinch point because the town is not projected to have excess reserves necessary to fund those necessary road improvements.”

Capital Fund facing future negative balance
Gephart highlighted concerns over declining General Fund transfers to the Capital Fund, combined with significant planned expenditures, including a $5 million cash contribution toward a police facility in FY 26/27. He noted, that “we’re showing a negative fund balance in the Capital Fund,” with deficits expected by FY 2030. This suggests potential financial challenges if the town does not secure additional debt financing or alternative revenue sources. The amount of the transfer is 5% allocation of sales tax revenue as required by town financial policies. Additionally, any General Fund balance exceeding the 30% reserve requirement (excluding contingency funds) is also transferred to the Capital Fund to support capital expenditures.

Hoping for federal funding for bridge repairs
A key issue is the exclusion of approximately $8 million in bridge repair costs from the forecast. These include necessary infrastructure projects like the La Cañada and Rancho Vistoso bridge deck repairs. The town has applied for federal funding through congressionally directed spending, but Gephart acknowledged uncertainty: “I don’t have a sense as to the probability or prospect of that occurring.” If the funding is not secured, the financial responsibility will fall back on the town.

Community Center Fund remains balanced but cautious
Unlike other funds, the Community Center Fund remains stable and self-sufficient, with modest 3% annual revenue growth. Gephart pointed out that conservative revenue assumptions for golf and recreation activities, combined with the ending of HOA contributions, necessitate careful planning. He noted positively that the fund is “staying balanced and self-supporting,” demonstrating sound financial management even as other town funds face more significant challenges.

Reasons for optimism: There are solutions
All these factors add up to a challenging financial future for Oro Valley. However, there is reason for optimism. Read about some solutions tomorrow.

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Additional resources:

• April 2024 LOVE article on the five-year financial forecast
• Town Seeking Funds for Bridge Repairs" 
• January 2025 Grant Status Update
• August 2025 Bridge Celebration 

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Bits and Pieces

Council doesn’t like town staff five year financial projection message that “the future ain’t what it use to be”
Town Finance Director David Gephart’s message to council at last week's town council meeting was clear: There are going to be financial headwinds in Oro Valley’s future. 

“The [five year financial] forecast does not include really enough to keep the town functioning the way it ought to and keep service levels and … especially maintaining our capital assets.” As reported by LOVE, that is after issuing bonds to pay for needed public works projects.  Even worse, the projection does not include at lease one major future capital need: The funding of a new police facility.

The council's reaction? Two council members felt that the forecasts were overly pessimistic. Two focused on the challenge presented in the forecast of maintaining a maturing infrastructure, especially bridges, during times of higher inflation than historic norms. There was discussion of the many capital projects that were not included in the forecast simply because the town has no idea of some of these costs and how they will be financed.

Wilkins strikes again: Police Chief “informed” that financial projections include needed new police facility this year
The five-year projection does not include funds for a new police station. However, we did find it listed as a future "contingent project" in a future year in the town manager's 2024 recommended budget. It's contingent because, according to the town, it has yet to be defined and they don't know how they are going to fund it.

This is a surprise.

A new station has been included in the ten-year capital improvements plan for many years. The estimate ranges from $25 to $40 million. Town Finance Director Gebhart said that the town has no idea what facilities are needed.  

The police were not involved in the decision to not include a new facility in the projection. Instead of being part of the process, they were "informed" that it would not be included.

The Police Department reports directly to the council. The town manager has no role in their operation and no authority to exclude the police facility from the forecast.

Naranja Park Opens May 18
It’s finally here! The town will host a reopening event for Naranja Park on May 18. The event starts at 9am. “The event will include activity demos, giveaways for kids and adults and remarks from the contractor, town staff and elected officials. The ceremony will take place at the north end of the park near the skate park and pump track.” (Oro Valley Parks and Recreation Email) This marks the “mostly completion” of a park that started with a groundbreaking event on January 27,  2014. It been a long time,  with an investment of well over $30 plus million over the years, converting a gravel pit into a beautiful regional park.

“Behind the Scenes” with Oro Valley’s Public Works Department
The town’s Public Works Department plays a key role in building and maintaining the town's infrastructure.  Click this link to meet the people who make this happen.

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Financial Headwinds in the Offing Starting in 2026

Town projects that it may need at least $11 million in bond funds in 2026-27
The Town of Oro Valley will need to issue a minimum of $11 million in bonds in fiscal year 2026-2027 to cover a major shortfall in funding for major highway projects and the ever-growing costs of the pavement preservation program. 

This information was disclosed by Town Finance Director David Gephart during his presentation of the latest five-year financial forecast to the town’s Finance and Budget Commission last week. "We've got a funding gap that we're going to have to address in some form or fashion," he stated. This gap manifests as a negative ending balance of $8.5 million in the capital fund by Fiscal year 2029 if no bond is issued. It is a gap that begins to build in fiscal year 2027.

This is the minimum needed because it assumes the deferral of many capital projects, including one that would replace the current police facility
“We placed a lot of projects that have been in the CIP in prior years…off to the side. We're going to be looking for again additional alternative sources to fund some of those grant funding and you know probably might be looking at some revenue enhancements and things like that….We don't have those really really dialed in or assumed in the forecast.”

Three reasons for the projected funding shortfall

• The forecast predicts that the General Fund will experience a reduction in the surplus of revenues compared to expenditures (see panel right). According to Gephart, one cause is a decrease in state shared tax revenues. The other cause is a significant increase in operating and maintenance costs “…because we're seeing higher inflation.” 
• The town has a number of bridge and road repairs that need to be done. At the same time, the costs of the pavement preservation program are skyrocketing. “We’re hoping that that growth moderates. We don't anticipate that it's going to go up another 50% but this is where we're at.” 
• Growth in gasoline tax revenues cannot keep up with inflation. “What we're assuming is really moderate growth 3.4% to 3.6% in highway user gas tax revenues and that's provided to us from the Arizona Department of Transportation.” 

Taken as a whole, the town’s cash balances will decrease by $6.8 million even after an $11 million bond issue
Gephart reflected on the situation by focusing on four funds. However, funds in these accounts are frequently transferred around. For example, in this instance, the bond funds would initially be part of the General Fund, then transferred to the Capital Fund, and subsequently to the Highway Fund. So, we totaled their balance. We included the Community Center Fund because it also receives such transfers for capital spending. According to Gephart, "The Community Center Fund actually looks solid.”

The shortfall is really $17.8 million.
According to Gephart’s forecast, by 2029, the total ending balances of these funds will decrease by $7 million. This decrease is after the issuance of the $11 million in bond funding. So, the shortfall in funding is $17million. (see panel left)

And remember…there are other capital projects that Gephart has assumed will be deferred.

Financial headwinds ahead
Several weeks ago, in "In For A Penny, In For A Pound," we mentioned that the town would begin encountering challenging financial decisions once the Parks Bond Money and the ARPA Funds are depleted. We highlighted this after the town council swiftly approved $390,000 to replace a bridge on a town golf course. "Those days are behind us. The 2025 budget will reflect some remaining funds, but the bulk of town funding will need to come from ongoing revenue sources. We anticipate budgets becoming increasingly constrained over time.”

The town has ample time to set the right course

Yes. Gephart’s five year financial projections affirm just that. Remember: These projections are based on a set of assumptions of events that may or may not happen. The further out the forecast year, the less likely that the forecasted result will happen. But, the projected results are a warning that strong financial discipline will be required to navigate the choppy waters.
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John's Place: "Predicting Oro Valley's Financial Future"

Town Finance Director Stacey Lemos presented a 5-year financial forecast of revenue and expenditures will be for Oro Valley to town council on May 7.  Council Meeting.

5-Year Operating Fund Forecast

A financial forecast is a prediction.  Those who prepare it try to identify the underlying factors (assumptions) that might influence the forecast.

Let's use the operating fund as an example.

The operating fund forecast shows major change in 2014-15.  This is because of the tremendous increase in spending as will likely be approved by council on May 21.  After that, spending and expenditure change modestly.

Lemos made a number of revenue and expenditure assumptions in making this forecast. Regarding the General Fund receipts, "The forecast reflects continued economic growth," according to Lemos. Specifically:

• Local sales tax revenues will grow from between 3% and 4%
• State shared revenues will grow from 1% to 5%.
• Residential contraction will be from 200-300 permits per year, peaking in 2015-16;
• Construction permit revenues will be stable at $350,000; and
• There will be no annexations.

Regarding General Fund spending

• Salary increases will be 4%-5% per year
• Minimal growth in new positions
• Pension increases growing to up to 2% per year
• No change in health benefit costs
• Operating and maintenance costs to remain flat
• Some spending for capital improvements, up to $2.5 million per year

Forecasting methods incorporate intuitive judgments, opinions and subjective probability estimates.  So, really, one can agree or disagree with Lemos' assumptions.

Still, risk and uncertainty are central to forecasting and prediction. It is generally considered good practice to indicate the degree of uncertainty attaching to forecasts. This is referred to as forecast error.

We did not hear any discussion of forecast error in the 5 year projections. Forecast error is the difference between the actual or real and the predicted or forecast value. Regardless of the underlying supporting assumptions the forecast will always be wrong. Only time will tell. No one accurately predicted the national recession we have been going through for the last 6 years.

Could it be that the 5 year financial forecast was an attempt to support increased baseline spending in the Town Manager's Recommended Budget for every future year, because it certainly does include extremely high levels of salary increases.

Even Oro Valley resident Bill Adler, who frequently advocates for a property tax, stated at the meeting: "It is clear from the graphs that the future is tenuous. We're not going to achieve any significant surpluses. It is clear from the projections. So, I don't know where the money is going to come from to continue improving the town."
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