Financial Hole

Taxes may be on the rise to make up for a shortfall in the city's self-insurance program

A long string of numerals bracketed within parentheses—signifying deficits—are almost never good to see on budget reports.

And that's exactly what the city of Tucson's self-insurance fund has experienced for many years.

To help get the program out of its deep financial hole, an increase of more than 15 percent in the city's primary property-tax rate may be looming.

"The budget wasn't adopted with the right number," says Kelly Gottschalk, Tucson's finance director, says about the self-insurance deficit that has developed over time. "The allocations (from city departments) weren't sufficient, and it's a problem we're trying to resolve by building surpluses into their rates over the next 15 years or less."

How has the budget for the city's self-insurance fund been developed?

"An estimate (of the risk) is done for the coming fiscal year, based on the history of claims," Gottschalk says. "Then that amount is divided up between individual city departments, and each month, one-twelfth of it is transferred from their budgets."

The deficit problem developed, according to Gottschalk, because not enough money was collected from the various departments.

The program's current deficit of almost $18 million isn't anything new. Since 2005, the figure has ranged from a low of $12 million to a high of close to $30 million.

Despite the deficit complexities, the outlines of the city's self-insurance program are fairly straightforward. It pays more than $6 million annually in commercial insurance premiums to—among other things—cover individual claims of more than $3 million.

At the same time, according to the city's most recent audit: "The city retains all of the risk not covered by commercial carriers." That risk means the city currently pays $6 million annually in uncovered claims that come from a wide variety of cases, Gottschalk says.

"The city cleaned the landscaping off the wrong property for a roadway-widening project," Gottschalk offers as an example of one claim; others include city bus and truck accidents.

"Everything under the sun," Gottschalk summarizes.

One pending financial obligation could significantly impact the city's self-insurance fund.

In February, a jury decided the city—because of its poor roadway design—was responsible for one-third of the $40 million awarded to the family of Joe Rincon Jr. He was killed when he was hit by a drunk driver as he rode his bicycle on Broadway Boulevard.

If that judgment is upheld, Gottschalk says, "The city's general fund would have to pay $3 million in that case. There are no reserves (in the self-insurance fund), and the money has to come from somewhere."

That obviously wouldn't be welcome news at City Hall, especially since the general fund is facing a deficit of more than $20 million in the coming fiscal year.

On top of the potential budget-busting impact of the Rincon case, the self-insurance fund already took a major hit earlier this fiscal year. The City Council initially set aside $1.65 million as a "general-fund contribution" to the program in the year's initial budget. However, that pledge disappeared thanks to the city's ongoing budget crisis, and as a result, the self-insurance fund finds itself in a deeper hole.

One of the ways to help close that hole might include higher taxes. State law limits annual increases in local primary property-tax rates to 2 percent without specific voter approval—except in the case of paying "involuntary tort judgments."

In February, City Attorney Mike Rankin proposed implementing this legal provision about "involuntary tort judgments" as a way for the city to "diversify its revenue sources and realize more revenues from property taxes."

While indicating an "increase in the tax levy could be unpopular politically," Rankin estimates approximately $2 million might be generated from putting such a measure in place.

Rankin says the idea is still being explored to determine what type of legal judgments would qualify. Eventually, the Arizona Attorney General's Office would have to approve any qualifying judgments. Scottsdale and Phoenix, Rankin adds, have previously implemented this method of increasing the primary property tax—and Phoenix did so for the current fiscal year.

Phoenix budgeted $5.2 million in property-tax receipts to offset these approved judgments—although officials didn't raise their overall property tax rate to collect those revenues. According to Mark Cernetic, of Phoenix's Finance Department, the funds were collected through a bookkeeping shift: To pay for the judgments, the city's secondary property-tax rate, which covers debt service on voter-approved bonds, was lowered slightly, while the primary-property tax rate rose by a similar amount.

Due to debt-service requirements, Gottschalk believes that such a maneuver wouldn't be possible in Tucson during the next fiscal year. So, in order to raise $2 million, Tucson's primary property tax rate would have to be increased by approximately one-sixth. Based on rough calculations, that increase would cost the owner of a house with an assessed valuation of $150,000 about $8 extra a year.

Rankin's suggested "tort liability charge" was one of 25 potential revenue and fee increases the City Council was scheduled to review on Tuesday, March 23. At the same meeting, Gottschalk was slated to present detailed information about the city's insurance funds.

"We need to make changes to get to where we should be. It's a priority issue," Gottschalk says about the city's self-insurance deficit.