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Changes to revenue-sharing system would devastate cities

If anyone doubts the state’s troubled economy is clobbering Arizona’s cities and towns, they only have to look in the newspaper. “Phoenix details plan for drastic cutbacks;” “Cities, towns resort to layoffs;” “Falling revenues affect city of Prescott operations.”

The story is the same from all parts of the state, from communities large and small.

Yet, despite this unprecedented situation, cities and towns are making the difficult decisions to balance the delivery of vital public services with the revenues available. They are living within their means.

An essential part of keeping Arizona cities whole and operating is our system of revenue sharing. Established decades ago as a trust between Arizona residents and their state government, the revenue-sharing system is based on the belief that the state prospers only when its component parts prosper.

When Arizona voters established the revenue-sharing system, they created a convenient source for revenue collections – the state government – but they made it clear that a portion of the money collected actually belong to local governments. They are local funds collected by the state and remitted back on a per-capita basis. The system has benefited both municipalities and the state government.

For businesses to succeed they need to locate in a place with excellent transportation and water infrastructure, a qualified work force, and safe, livable communities. That’s exactly what Arizona’s cities and towns do exceptionally well.

Indeed, studies have shown that while 83 percent of the state’s population lives within a city or town, more than 91 percent of the tax revenue collected by the state originates from financial activities within incorporated communities. The economy of the state is based in our cities and towns.

Why has this system functioned so well for so long? In part because cities and towns do not impose their own income tax with varying rates, because there is predictability in budgeting since proceeds are distributed on a “two-year lag” basis, and because money is spread to all parts of the state equally, which is particularly important to rural Arizona.

This two-year delay in distributing Urban Revenue Sharing allows the Department of Revenue adequate time to finalize income tax collection amounts so that 15 percent of the proceeds can be accurately distributed to cities and towns. The state retains 85 percent of the proceeds. This delay also allows local policymakers to have some certainty about the amounts they will receive in the upcoming year, enabling them to plan on staffing and service levels.

But, the delay is sometimes a double-edged sword. As the overall economy appears to be slowly stabilizing, cities and towns will be experiencing another reduction of 24.6 percent in Urban Revenue Sharing in fiscal 2011. That’s a cut of $155 million just due to the poor economy of two years ago.

As state revenues have plunged in the last three years, local revenues have tracked along the same line.

So, should the Legislature look to balance its budget by reducing revenue sharing? Only if we have no desire to ever recover economically. About 40 percent of the typical city general fund budget is made up from revenue-sharing funds. Generally, more than 50 percent of a city’s general fund expenditures are for public safety.

Cutting revenue-sharing funds would be a financial catastrophe for the state, crippling the very building blocks that are the foundation of our economy. Such cuts would also likely force many communities into bankruptcy, or force them to raise local taxes even more.

As bad as our situation today is, cutting local government revenue- sharing would only make it worse, not better. Let’s learn from the lessons of the last seven decades and keep our Arizona revenue-sharing system intact. And, together, we will grow our economy back – stronger and more diversified.

- Ken Strobeck is executive director of the League of Arizona Cities and Towns.

Click here to read main story “Passing the buck: Local governments’ worst budget fears”

Click here to read sidebar “Local governments against changes to shared-revenue formula”

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