Working together…learning together

November 15, 2010

As part of our efforts to keep you informed on the FY 2012 budget process as it unfolds, I would
like to respond to some misinformation in the media over the past week related to the November
9, 2010 Mayor and Council Study Session item on the 1st Quarter Finance Department update.
The powerpoint presentation from that item is posted to the City website on the recently created
“FY 2012 Budget Preparation” page http://cms3.tucsonaz.gov/fy2012budget.

The Arizona Daily Star article on Wednesday, November 10, was inaccurate in stating that the
“City received $7.4 million more in revenues than expected.” City staff spoke to the reporter,
Rob O’Dell, about this misinformation and he has agreed to report it differently in the future.
The City did end Fiscal Year 2010 with a positive $7.4 million. This was a result of the total
expenditure cuts being greater than the total loss in revenue (illustrated on Slide 16).

In addition, the Star article was inaccurate in stating that the year-end financial results had
always been presented to Mayor and Council in August or September. In the past, results were
provided between September and December. Kelly Gottschalk, the City’s Chief Financial
Officer felt it would be more meaningful and accurate to combine the year-end results with the
1st Quarter update, which meant they were available in late October. The item was scheduled
for October 26th but was then moved to accommodate the Hotel Study Session.

As you may recall, the Fiscal Year 2011 budget was balanced with a one-time revenue item of
$24.7 million, which was to be a combination of land sales and/or a sales/leaseback of City
assets. It has been said all along that the sale/leaseback was the last resort and if the Fiscal
Year 2010 results were positive, it would be used to mitigate the need for this transaction.

Slide 18 of the PowerPoint illustrates the mitigation of the need for the sale/leaseback
transaction. This calculation shows a reduction in the need of $8.2 million from the estimated
savings and new revenues as a result of the actions M&C took on October 5th. It also shows a
reduction of $11.2 million, which is a combination of the $7.4 (from above: Fiscal Year 2010
expenditure cuts in excess of revenue loss) and $3.8 million from purchasing an insurance
policy to replace a debt service reserve fund. This transaction allowed $3.8 million to be “freed
up” which had been included in “reserved” fund balance and make it “unreserved” and available
to help mitigate the need for the sale/leaseback transaction. More detail is provided on Slide 17
of the PowerPoint.

Also, during the discussion of Slide 17, it was stated that the majority of the items discussed
were one-time items and would not reduce the estimated $51 million deficit for Fiscal Year
2012. Some of the $7.4 million may be sustainable and could help Fiscal Year 2012 but it is too
early to know for sure. It was not said at the meeting, but the Financial Monitoring Team is in
the process of meeting with all of the departments as part of the quarterly financial monitoring
process and nothing of significant size is coming to our attention that will reduce the estimated
Fiscal Year 2012 deficit.

Local talk radio hosts are stating that the City has found additional money and that the budget
deficit has shrunk by $40 million; this is not true. The Study Session item addressed Fiscal
Year 2010 year-end results, the mitigation of the Fiscal Year 2011 need for the sale/leaseback
transaction and a first quarter revenue update for Fiscal Year 2011. Staff did not address Fiscal
Year 2012 budget at this meeting. At this time staff has not reduced our estimate of the deficit
for Fiscal Year 2012, if anything it may become greater depending on the actions of the State.

Mike Letcher
City Manager