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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Tonight, Oro Valley Town Council Focuses On Bonding $25 Million in Parks and Recreation Spending

A $25 million borrowing

The focus of the town council tonight is financing Parks and Recreation spending of more than $25Million over the next three years. Last night, the town’s Parks and Recreation Commission discussed what will be done and when it will happen [See Panel]. Tonight, the town council will review and likely approve the details of a municipal bond issue to fund $25 million in spending on these items.

It will be a challenging meeting because of the detail nature of the discussion. What follows is our synopsis of the key elements of the financing.

The money will be repaid over 20 years in annual amounts of $1.7 million per year. 

This assumes that the face interest rate of the bonds is to be no more than 3.5%. The actual rate is determined on the date that the bonds are sold to the public. Town Finance Director David Gephart estimates that the effective rate on these bonds will be from 2% to 2.25%. According to him, this will be a bit less than the effective rate on the bonds the town issued to pay down it's public safety debt. Those bonds were taxable bonds with an effective rate of 2.39%.

The town anticipates issuing bonds in the amount of $20,990,000. It anticipates that the face interest rate on the bonds will be such that investors will a premium of $4.4 million to own the bonds. Thus, the bond issuance would raise $25.4 million of which $25 million will go into the project fund. The remaining amount will be used to pay fees.

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The actual borrowing will be more than $25 million

This is because of  fees paid to four third party participants: A special legal counsel, a financial advisor, a trustee, and an underwriter [those who actually sell the bonds].  The total of these costs is estimated to be $357,000.

In this case, the special council is Gust Rosenfeld P.L.C. The financial advisor is Stifel, Nicolaus & Company. The trustee is U.S. National Bank Association, a division of U.S. Bankcorp. The underwriter is Piper Sandler & Co.

These are revenue bonds

The funds to repay these bonds are pledged from the town's sales ["excise"] tax revenues. Thus, they are called excise tax revenue obligations. The town is pledging all not previously pledged sales tax revenues to pay for the bonds. This means that the sales tax revenues must be used first to pay back the bonds. What is left can be used for town operations.

Primary backing is the half cent parks and recreation sales tax

Though the town is pledging all of its sales taxes to pay bond service, the primary fund being pledged is the half cent sales "community center" tax fund. This is now to be called the "Parks and Recreation Excise Tax Fund"

The town believes that fund will have sufficient capital over the 20 year time frame.

"The Town forecasts that the 0.5% sales tax the Town Council identified as the fund source for this bond repayment will be sufficient for both the continuing operations of the Town's golf courses and community center as well as the repayment." (Source)

The interest on these bonds is "tax free"

These bonds are being issued for a civic purpose. Thus the interest on these bonds is tax free. That is, the bondholder will not pay interest on these bonds. This is unlike the $27 million in bonds the town issued in July to reduce the town's large public safety pension underfunding. The interest on these bonds is taxable because the use of the proceeds to pay previous debt is not a "non taxable" use, per IRS rules. The difference between the two types of bonds matters because taxable bonds are generally only purchased by investors who have no tax liability, such as a University's endowment fund.

The proceeds of the bond will be held by a trustee

The proceeds do not become part of the town's general fund. According to the trust agreement the trustee xxx  will disburse the funds for one of three reasons:

• to finance costs related to the project;
• to pay trustee costs and fees and
• to pay pay all or a portion of the costs of delivery of the 2021 Obligations

Generally, the proceeds are reinvested so that earn interest until they are used. In this case, the funds will be used over a three year period.

Bond agreement allows sales tax reduction only if certain conditions are met

Essentially the bond agreement requires that the town maintain sales tax levies at the same level as today. However, the town can reduce sales tax rates as long as the resultant sales taxes are "...equal to at least two times the Annual Debt Service Requirement (as defined in the Trust Agreement) payable under the Agreement. This is approximately $3.4 million. 

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Naranja Park …. Vistoso Preserve… and more…

Council prioritizes projects in the $25 million Parks and Recreation Bond…but not without controversy
The Town Council set priorities for specific parks and recreation projects to be funded by an approximate $25 million bond that will be issued this fall. The projects are listed in the panel that follows. The bond will be repaid by approximately half of the half percent sales tax the town levies to fund the town’s three golf courses and the community center. Town Manager Jacobs and Town Finance Director Gebhart assured the council that the town will have the funds from the sales tax levy to repay these bonds under any foreseeable circumstance. 

The projects that are included in the bond are in addition to projects included in the 2021-22 Parks and Recreation Budget. $1.3 million in this budget is designated spending for Steam Pump Ranch. According to Council Member Bohen this amount is far too little. “Steam Pump Ranch has never been a priority” and there are many unmet needs. 

Council Members Solomon and Greene voted against the priority list. Pointing to the town’s statistically valid survey of resident parks and recreation needs done just last year, Solomon noted that Naranja Park was not even on the list. Solomon stated that the inclusion of massive funding for Naranja Park in this bond simply does not meet the wishes of the residents. 

Solomon is correct that the survey reflects no significant resident interest in building Naranja Park. This has been true since the day the county gave this stone and mortar quarry to Oro Valley. Naranja Park has never been important to the majority of residents. It has only been important to members of council.

Former Vistoso Golf land purchase negotiations continue… Some resolution perhaps in September

Speaking at last week’s council meetings, Rancho Vistoso residents were complementary of Mayor Winfield, Vice Mayor Barrett and Town Attorney Jonathan Rothschild “for their diligent, hard work in bringing this matter to closure.” They were speaking in regards to ongoing negotiations regarding the former Vistoso Golf Course. The matter remains in negotiation. 

 
Speaking after executive session, Town Outside Counsel Rothschild stated that Romspen has “agreed” to a specified price for the property. The Conservation Fund has agreed to purchase the property for the appraised value, which will be known in August.” It is possible that the appraised value will be less than meet amount Romspen wants for the property. Thus, the council likely will have to consider legal options, which may include condemnation, to force a resolution. 

Council Member Solomon said: “We are very close.” Residents hope so. “Its’ been three years”, one resident noted. “Time to bring this to a conclusion.”

Council adjourns until September 7 meeting… Will unveil upgraded council chambers

It will be an “in person” meeting in renovated council chambers. Public participation will be available in person. The town will use Zoom participation for public hearings only. Thus, one who wants to participate in the “call to audience” segment will have to do so in person. Town Manager Jacobs stated that the town will provide more information on how these meetings and those of the town’s boards and commission will take place.

$18 Million in Pension Bonds Priced at 2.39% to be issued July 1

“S&P affirms Oro Valley's AA+ rating; PSPRS bond issuance at 2.39% 

S&P Global Ratings has affirmed its AA+ rating for the Town of Oro Valley's upcoming $18 million in pension obligation bonds (Public Safety Personnel Retirement System, or PSPRS). Among other things, S&P noted that the Town of Oro Valley has strong economic fundamentals, extraordinarily strong maximum annual debt service coverage, and low volatility of its sales tax collections. This rating helped the Town obtain a highly competitive interest rate of 2.39% for the bonds, which ultimately lowers the amount the Town pays for its chosen method of reducing its PSPRS unfunded liability. Bonds are projected to be issued July 1, 2021, and will be combined with $10 million in reserves, resulting in 100% funding for its public safety pension systems.”

(Source: Town of Oro Valley Press Release)

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Bonds To Pay Down Unfunded Pension Liability Could Exceed $18 million

Fixing the unfunded pension liability

The town council will discuss and likely approve the structure of the bonds to be issued to fund the town’s PSPRS liability at tonight’s council meeting. The resolution pending approval authorizes the Mayor, Town Manager and Chief Financial Officer to move forward with negotiating, finalizing and issuing the bonds this July. 

The total amount of the borrowing is not to exceed $18.13 million

That is $1.33 million greater than the $17 million payment the town will make from these borrowings to the PSPRS. We suspect that this additional amount represents fees paid the financial advisor, Stifel Nicolas and Company, and others to register (with the SEC) and syndicate the bonds.

The bond will be in denominations of $5,000

The bonds will not be sold directly to the public. Rather, the town will engage an underwriter who will likely sell the bonds to institutional investors. A bond issue of this size is very small and should be easy to place, especially give the town’s excellent credit rating. Some portion of the bonds will mature each year, on a schedule starting as early as 2022. Per the resolution, the total borrowing must be repaid by 2039.

These are taxable revenue bonds, secured by the town’s unencumbered sales tax revenues and fees

This feature allows the town to seek the most favorable interest rates on the market. The resolution also gives the town finance director the option of purchasing insurance that would guarantee interest payments. This option is rarely executed in today’s markets.

The interest on these bonds will be taxable. This is because the activity of using the funds to pay for pension shortfalls does not meet IRS requirements to be a non taxable bond. To an extent, the taxable status broadens the market for selling the bonds by making the bonds more appealing to investors who can’t take advantage of tax free interest. For example, a University endowment may be interested in these bonds.

 

Other Arizona governing entities doing the same

The practice of issuing taxable bonds to pay for pension shortfalls came into being when the State of Illinois did so in 2010 to cover its massive pension shortfall. This now seems to be the “standard method” in Arizona. Three examples are Cottonwood,  Pinal County and Kingman.  Flagstaff is also working to reduce its pension liability by selling and leasing back municipal facilities.

Issuing these bonds is a major step in reducing the town’s unfunded pension liability.

Council Planning To Add $43Million In Debt To Oro Valley In 2022

Two measures: $43 million

The Oro Valley Town Council has passed two measures in the past month that, if approved in the 202-22 budget, will add $43 million in debt to the town. One is the previously reported issuance of $17million in debt to pay down the town's police pension (“PSPRS”) unfunded liability. The other is the incurrence of up to $25million in debt to finance what was to be a ten-year parks and recreation master plan.This is a plan that council has not publicly heard or approved.

“Pay as you go” is out… debt is in

Approval of bonding for the parks plan will abandon this council’s stated position to use “pay as you go” for parks and recreation facilities. This is the position the council affirmed last year when it approved a five year plan to reduce the annual subsidy of municipal golf to no more than $750,000 within five years. Currently, improvements to that facility as to all facilities was to be paid from current fund proceeds. This has been the town’s practice since its inception in 1974.

Cheap interest rates drive both debt decisions

One stated justification for doing this measure is the same was used for supporting the PSPRS debt: “Interest rates are cheap.” The town has estimated that it will be able to issue bonds with a less than 3% interest rate. They may well be able to do so as there is currently a dearth of new municipal bond issues in the market. But, this level of borrowing is a lot for a town of our size. It could reduce the town’s credit rating unless it pledges the sales tax money as collateral on the loan.

Recent reduced golf losses and increased sales tax revenues also drove decision to borrow to fund parks and recreation facilities

In addition to cheap interest rates, there was added rationale given for borrowing to fund the parks: Losses on municipal golf are down because the new golf operator has done a better job of operating the course than the last golf operator; and half-percent sales tax receipts are up. The council expects that both of these events will continue indefinitely.

Measure “shares the wealth” generated by the half-percent sales tax 

The measure was proposed by Mayor Winfield and Vice Mayor Barrett. One of their stated objectives is to bring unity to the town by “sharing the wealth” through use of the half-percent golf sales tax. Barrett observed in her remarks during the meeting that the sales tax is paid by everyone and that, therefore, it should be used for the benefit of everyone. The language of the resolution (included in the panel above) does just that, proposing that bond funds be used to complete Naranja Park and improving other key parks facilities.  You can watch the Vice Mayor’s comments here.

Pending 2021-22 Budget Adoption

The bonding and the use of bond proceeds are included in the town’s tentative budget. Town residents will have the opportunity to opine on any item in the tentative budget in two upcoming town hearings. The bondings will happen in the late summer if they are included in the final budget.

Bits and Pieces

Marana Town Manager Get’s $200K. Will Oro Valley’s Town Manager Jacobs be left behind?
Marana’s former police chief, Terry Rozema, is now the town’s new town manager. He is getting $200,000 in his new job. This plus perks like a car and nice benefits. (Source: Arizona Daily Star) Oro Valley’s Town Manager Jacobs currently earns less. Will she be left behind?

Did you know that the town already borrowed for the “turnkey” community center?
Former Mayor Hiremath assured us that the clubhouse at the purchased El Conquistador County Club was “turnkey”. As it turned out, it was far from that. The 2021 Parks and Recreation Plan has funds recommended for inclusion to fix up the place. Bet you did not know, however, that the town issued a bond for $2,000,000 in late 2016 to pay for energy improvements. The bonds have a 15 year life.

Reconsideration of Kai-Capri General Plan Amendment avoided need for public hearings
The “original” council discussions of the Kai-Capri amendment required notice of public hearing. According to the town, the reconsideration that happened last week did not require public notice. As such, except for LOVE and the site Takebackov.com, the general public didn’t even know there was further consideration of the amendment. The Mayor did take public comment but the meeting was dominated by speakers garnered by the applicant and the Oro Valley Chamber of Commerce. This, once again, gave the Mayor a false impression that the public did not care about this amendment. The amendment failed to be approved. But, we guarantee, it will be back in some form in the next year or two

PAC "Oro Valley Strong" financed by current and former town council members
A current and former Oro Valley council members are funding a PAC called "Oro Valley Strong".  The PAC has raised more than $3,000. Contributors include: 

• Council Member Mo Greene ($1,020.80 from his 2020 campaign 
• Former Council Member Joe Hornat ($250) 
• Former Council Member Bill Rodman ($250) 
• Former Council Member Dick Johnson ($250) 

Several other contributors are Oro Valley residents who are always disparaging current council leadership and new member Bohen. Expect them to position candidates for 2022. That is their prerogative. The PAC was founded by Oro Valley resident Don Cox. A recent PAC organization filing shows that Oro Valley resident Tom Plantz is now the chairperson. Cox is a former member of the Planning and Zoning Commission.

The group Preserve Vistoso encourages all to voice support for a future preserve to council
The group Preserve Vistoso is recommending residents to speak during the “call to audience” section of Oro Valley Town Council meetings. The hope is that they will voice their support of the town’s sought purchase of the former Vistoso Golf course. Things to discuss could be the willingness of the Vistoso’ community to financially participate in the purchase; as well as their support of some the the annual maintenance cost of what will be a natural park preserve.

Town seeking applicant for stormwater commission

The town is seeking an applicant for one position on the stormwater commission.  Applicants must be residents of the Town of Oro Valley. The open position is a two-year term. 

"The SWUC makes recommendations to the Town Council on issues relating to flood control, stormwater quality management, the issuance of bonds for stormwater activities and the prescription of service charges. The SWUC meets on the third Thursday of the month at 4 p.m. Due to COVID-19, meetings are currently being held online via Zoom. 

Residents who are interested in applying for this position can contact the Town Clerk’s Office at 520-229-4700 or apply online by visiting the Boards and Commissions Opportunities webpage. (Source)

Wish us luck...

We're getting our second Covid-19 vaccine shot today. We heard that some have reaction to it. Our hope is that we won't and that, in two weeks, we'll have significant protection against this blight. Have you got your shots yet?

Town Staff: "Bond Finance Golf Course/Community Center Improvements"

Staff recommends $3.2 Million in bond financing
Oro Valley Town Manager Mary Jacobs is recommending that the town issue bonds to finance almost half of the $7.2 million in funding proposed for golf course and community center improvements.

This recommendation is in response to the October second Oro Valley council request that staff "...review and provide an analysis and recommendation on financing options for the capital investments needed for the Town’s community center and 36 holes of golf."

Spending pegged at $6.8 million but that may not be all!

Click on picture to enlarge

"A total project budget of $6.8M has been used in the assumptions for the financing options; however, in the future, a detailed project scope will be required to determine an appropriate project construction budget and will likely differ from the $6.8M used for these assumptions." $3.8 million is for golf course improvements while $3.0 million is for community center improvements.

Plan to "borrow" from the General Fund
The staff plan "borrow" $2.1 million from the town's general fund. This is the fund that pays for town operations. The funds are forecasted to be repaid in fiscal years 2021-2024. No interest is to be charged on this debt.

The fund currently owes the general fund $1.19 million.

Bond interest could be taxable to the lender, thus making the bonds relatively expensive
One of the advantages of bond financing that governments enjoy is that the interest paid on their bonds is not taxed to the lender. These are called "tax free" bonds. Thus, the bonds carry the lowest interest rate of all.

bonds compared to corporate bonds. In this case, however, the bond funds are going into a community center and golf fund that includes a nongovernment purpose: The operation of a golf course that is run by a private sector contractor.

 "Staff has not discussed the potential structure of the bonds (specifically bonds for improvements of the golf course) with the Town’s bond attorney to determine if they will qualify for tax-exempt status, given the use of a commercial operator for the golf course."

Sales tax increase would likely become permanent
The bonds, regardless of their tax status, will be backed either by the "full faith and credit" of the town (general obligation bond); or by a lien on sales tax revenue, state shared revenue, and permit and revenue fees (excise tax bond). Otherwise, the bonds would not be sale-able in the market. Either way, the town is obligated for as long as the bonds are in circulation, which will be at least 10 years. Thus, the town will be required to keep its already high sales tax rate in place.

No public vote required.. but history says "no bonds"
The bond decision is entirely up to the council. No public vote is required.

However, council does not have to look far to understand that residents prefer "pay as you go" funding over bond funding.  In the past Oro Valley residents have rejected a handful of bond proposals by at  least a 70% majority.

The residents want local government to live within its means.

In 2013, former Town Manager Greg Caton acknowledged this:  “In 2008, our voters told us they didn’t want to issue bonds for a big-ticket expense [Narjanja Park improvements], and we heard them loud and clear." Instead of bonds, Caton noted: "Our new approach to developing Naranja Park lays down the required infrastructure, then lets us add amenities a la carte, as funding is available, without going into debt or issuing bonds."

Council discussion of this is Wednesday
Town Council will consider these staff recommendations at this Wednesday's meeting. A follow-up discussion will occur on November 20.
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Want to know more about bonds? Read our Bond Primer"
Source of staff recommendations