Newly elected County Treasurer Doug Todd is a crusty pro who previously helped craft the state's multibillion-dollar budgets as chair of the Arizona Senate's Appropriations Committee.
With Todd was his chief deputy, Jim Hogan, who had spent his career crunching numbers for the legislature, Arizona State University and an international construction company.
Between them, the two men had years of experience seeing through financial smoke screens. They met with Pederson that day to tell the county's top administrator that, after a few months on the job, they had seen through his obfuscations.
As Todd and Hogan recount the meeting (Pederson did not return phone calls), they told Pederson the county's budget was in a tailspin.
Pederson and the Board of Supervisors were sinking the county deep into debt, the two men said, and swift action was needed to avert financial meltdown.
Pederson's response floored them. He said there was no problem.
"I have no information from my financial department that leads me to believe that the county is in any financial difficulty," Hogan remembers Pederson saying.
Todd, a Western-garbed old-timer not given to niceties, was incredulous, and laid it on the line.
"Well, you got some information from the county treasurer that says you are $82 million in debt, and that there is something very wrong," Todd told Pederson. "Wake up."
Pederson did not wake up. Nor did the Board of Supervisors.
Now, more than a year later, Pederson has been run out of his job because the county is in financial meltdown. County departments have been forced to slash services and lay off hundreds of employees as supervisors grapple with a shortfall in this year's operating funds.
Outside financial consultants have been hired to try to determine how the county's finances can be salvaged, and the next budget year--which begins July 1--promises even more cutbacks and layoffs.
Taxpayers--and county employees who might lose their jobs--are hard-pressed to understand how the nation's sixth-largest county can be nearly bankrupt, even as its economy is growing, and new, taxable houses and businesses are springing up all about.
It is even more difficult to understand given the board's willingness to approve $250 million in new sales taxes for construction of a major league baseball stadium.
"There is no real valid reason for Maricopa County to be in the fix it is in today," says Hogan. "The warning signs were there four years ago."
For the last four years, the county's own books have shown a serious erosion in the government's financial health. Warning signs of impending fiscal problems have been springing up across the financial landscape.
But the county's Board of Supervisors ignored the flashing lights and ducked the issue. Rather than trimming the budget or raising taxes to fill the steadily widening operating deficit, supervisors embarked on a financial shell game of borrowing money from obscure sources that kept the deficit hidden from public view.
The game has been costly. What was once a minor problem that could have been easily addressed has ballooned into a financial catastrophe that has thrown hundreds of people out of work and plunged the county deeply in debt.
Amazingly, the county is in a financial crisis even though the amount of tax money it collects each year has been going up at a steady, predictable pace.
The heart of the county's financial shell game is to move annual operating deficits into short-term credit lines--and then forget about them. Supervisors became addicted to this easy escape from tough financial decisions. That addiction continues, and even now, the full depth of the county's problems has not been fully explained to taxpayers.
Basically, county documents show, and financial experts agree, the supervisors have stealthily saddled taxpayers with at least $100 million in debt.
First, the county has racked up at least $64 million in debt that has been hidden for nearly a year from public view, because supervisors rolled it over and over through short-term loans.
In the governmental equivalent of using one credit card to pay off another, the debt has simply been refinanced again and again, so that it has never drawn taxpayer attention.
In addition, the county's hospital is projected to end this year $40 million in the red. That debt must be paid somehow.
Even if the board is successful in cutting $22 million from its current budget--and three times that much from next year's budget--it still must address a far more serious and fundamental problem--the $100 million debt.
Someday, somehow, the county will have to come up with cold, hard cash to pay it.
Publicly, current and former supervisors--most notably, former board chairman Jim Bruner and current chairwoman Betsey Bayless--have characterized the budget crisis as a complete surprise. They claim they were misled by bad financial estimates, and were never given any warning about the true depth of the county's problems.
That claim tests the bounds of credibility.
@rule:
@body:Earlier this year, Jim Bruner stepped down after five years on the Board of Supervisors to run for Congress armed with some potent campaign tools.
Bruner can boast, rightly, that he steadfastly held the line on property-tax increases while in office, and that he cast the high-profile swing vote in the decision to raise $250 million in sales taxes for a downtown baseball stadium.
Bruner's campaign literature undoubtedly will not point out that, at the same time, the county was sinking into utter financial crisis.
Bruner and current board chairwoman Betsey Bayless are the only two supervisors who held office during the full span of the county's plummet into debt.
They--and fellow supervisors--say they were given no warning of the impending disaster. The county's staff, they charge, fed them bad information. When they asked about the county's finances, the supervisors claim, they were assured that everything was fine.
"I would look to them and say to the chief financial officer, 'Give me your perspective on how we stand financially,'" Bayless says. "I always got a response that we were in fairly good shape."
Bruner says it was not until last fall that he began to learn the true extent of the county's problems, and he "exploded" when he did.
"I have never been so mad," Bruner says.
Bruner and Bayless assert that they were duped by the county's staff--specifically, former county manager Roy Pederson and former finance chief Ray Smith. Ironically, Pederson and Bruner have a long history of close ties, dating back to when Bruner was a Scottsdale city councilmember and Pederson was Scottsdale city manager. In fact, Bruner was the one who recruited Pederson for the top county administrative post after Pederson got caught in political crossfire while serving as a city manager in Colorado.
Accepting the supervisors' assertion of ignorance requires taxpayers to believe that two savvy politicians--two people who actually have jobs as financial-planning experts--somehow missed warning signs that have been showing up in the county's own budget documents for four years.
Bruner, an attorney, is the former chairman of the board of a bank, and since 1991, he has worked as a financial and estate planner for Snell & Wilmer, one of the state's most prestigious law firms.
Bayless, an investment banker, has been acting director of the state Department of Revenue; headed the state Department of Administration when it managed an $85 million annual budget; and served as an assistant director for the state Board of Regents, which oversees the budgets for the state's three universities.
Since 1987, Bayless has been a vice president at the investment banking firm Peacock Hislop Staley & Given, where she specializes in public finance. Ironically, the county has hired Bayless' firm in the past to help arrange some of the short-term credit it needed to patch over budget shortfalls.
(When she was first appointed to the Board of Supervisors in 1989, Bayless filed the required disclosure of her relationship with the firm, and does not vote on matters involving it. The firm is under consideration for an $18,000 contract from the county to help sort out its financial mess.)
On paper, it would seem that Bruner and Bayless have the credentials to spot potential financial problems from a mile away. During the past three years, there have been plenty of red flags waiting to be spotted. For some reason, they either completely missed the obvious--or chose to ignore it.
What made Treasurer Doug Todd and deputy county treasurer Jim Hogan recognize the county's financial problems soon after taking office was a huge difference between the income the county had projected it would receive and the amount of money that actually came in. Year after year--for five years, in fact--the actual revenue flowing into the county's general fund from a number of different sources increased at the remarkably steady pace of about 4.5 percent per year.
And year after year, the county had been projecting it would take in far more money than that.
The steady increases in revenue flowing to the county should have made it relatively simple for county budget analysts to come up with annual revenue projections, Hogan says. The accuracy of revenue projections is essential in developing a balanced budget, because projected expenditures need to be based on projected revenue.
During most of the 1980s, county budget officials, led by finance director Ray Smith, were able to accurately project revenue for upcoming budget years. "We never had a problem with projecting revenues," former supervisor Tom Freestone says.
But something happened in 1990, the last year the county had a sizable cash reserve--$20.2 million--and the same year Pederson became county manager. After ten years of being on the mark, the county's financial department suddenly seemed incapable of coming up with an accurate revenue projection for the upcoming budget year.
The county overestimated revenue for fiscal year 1990-91 by $22.8 million. As a result, expenditures exceeded revenue, and the county's reported cash reserves dropped to $7.5 million. (About this time, the county appears to have begun hiding a portion of operating deficits by borrowing.)
At this point, Hogan says, a crucial decision was made. Instead of adjusting its revenue estimates downward for the upcoming 1991-92 budget year to make sure expenditures weren't too high, the county budget forecasters increased their projected revenue. Once again, actual revenue came in $22 million less than projections. Expenditures again exceeded actual revenue, and cash reserves slipped to $3.4 million.
The scenario continued in the 1992-93 budget year, but this time, it got even worse.
"Not only did they increase their revenue projection, they increased it by an even greater amount than in past years. They did the opposite of what all the economic indicators were saying," Hogan says.
County budget analysts overestimated revenue projections for the 1992-93 fiscal year by a whopping $40.2 million. Even with $32 million in spending cuts, the county's reserves were wiped out.
How could the county budget analysts be so far off?
Smith, who left the county last summer after ten years as the top financial manager, declines to discuss the matter, other than to say that it was difficult to forecast revenue because of the turbulent economy.
Others in county government, including prominent Republicans, point to a different reason for the strange revenue estimates: the political ambitions of fellow Republican Jim Bruner, who was planning a run for Congress and who wanted, at the center of his campaign platform, a tenure on the Board of Supervisors that included no tax increases and no layoffs.
The easy way to accomplish this goal was to pass so-called balanced budgets based on overestimated revenue projections. At the end of the year, when shortfalls arose, cash reserves could cover the deficit. When that cash was gone, the deficits were hidden in short-term loans.
"If you project revenues to be coming in substantially higher than reality, that means you don't have to make the cuts at the beginning of the year to balance the budget," explains Supervisor Tom Rawles, who took office in January 1993. "At the end of the year, those revenues haven't come in, but you have spent the money, so what you have to do is borrow."
@rule:
@body:Year after year, the supervisors were asked to approve increasingly greater financial fixes to make up for shortfalls in the amount of money coming into county coffers. And approve them they did.
The most common fix was the use of what are called Tax Anticipation Notes--TANs--a completely legal way for the county to borrow money without voter approval.
The intent of such notes is to allow the county to get cash quickly and pay it back later, when county property owners start sending in tax checks.
Used for their intended purpose, the notes are a legitimate financial tool, because they allow the county, which must pay its bills every day, to adjust during times when property taxes aren't yet due. The county typically runs short of cash early in the year, before spring tax billings, and late in the summer, before fall billings are due. Ordinarily, TANs are used to tide a government over through a relatively short period, and therefore are issued for fairly small amounts of money. But in the past two years, the outstanding amount at any given time of short-term notes issued by the county has skyrocketed to more than $100 million.
Even that figure, though, does not capture the full size of the county's financial shell game. Supervisors repeatedly have approved one set of TANs to pay off another, or borrowed money from the county's highway fund, or tapped bank loans to pay off earlier TANs.
During the 1992-93 budget year, $215 million in short-term notes were issued. The county's desperation for cash has reached the point where it is now borrowing as much as $25 million from a 1986 bond issue that was passed by voters to build roads, bridges, prisons and court facilities.
In effect, the county has been churning its debt to stave off a final reckoning.
The short-term-borrowing gambit finally came to a turning point in mid-1992, when the county made a crucial decision and decided to borrow $75 million from Bank One (then Valley National Bank).
Deputy treasurer Hogan says it was unusual for the county to tap a bank credit line at the time, because the move would be more expensive than issuing tax-free municipal bonds to raise the money. But, he says, one advantage of the bank-borrowing was that it spared the county scrutiny from an outside bond-rating agency.
That move, in Hogan's view, was a huge red flag that something was amiss with the county's finances. Municipal governments live and die by their bond ratings, which essentially are independent reviews of their financial conditions. The higher the rating, the lower the interest on borrowings issued by the county.
Opting to pay higher interest rather than open its books to the rating companies just didn't make sense, Hogan says, unless there was something to hide. Indeed, a year later, the county had no choice but to go public, and the county's bond rating was downgraded.
After obtaining the $75 million bank loan, supervisors then turned to internal sources of cash, borrowing $35 million from the county's risk-management fund and $10 million from the 1986 bond fund.
But the day of reckoning finally came as the 1992-93 budget year closed. The county was faced with a shortfall in cash and couldn't cover $64 million of the borrowed Bank One money when the note came due. So it was forced to go to the public markets and borrow $100 million in TANs.
Moody's Investment Services, which passes judgment on the county's fiscal health when giving it a bond rating, had no trouble discerning that the $64 million represented accumulated operating deficits. Moody's response was pointed. It immediately downgraded Maricopa County's bond rating.
Today, county financial planners estimate, there is about $146 million in internal and external TANs outstanding. Nearly half of that amount is old debt that the county has been rolling over and over.
"The existing deficit, to my mind, is the rollover amount in the $50 to $60 million [range]," says the county's new chief financial officer, Deborah Larson.
And the deficit is expected to grow even more because of continuing losses at the county hospital.
Given the county's constant hunt for new sources of cash, observers say, it is hard to believe that the supervisors could not perceive they had a serious budget problem. The county's money movers could not borrow without the board's authorization.
The frequent financial fire drills to come up with cash should have raised questions in the minds of board members. "If you know how to read the [financial] statements, this should be pretty apparent. There's no way to hide these numbers on the financial statement," says Tim Hogan, head of the Arizona Center for Law in the Public Interest, a government watchdog group.
Even if the problem wasn't obvious, he says, the county's audited financial statements clearly showed a dramatic decline in the county's cash reserves, which should "at least cause you to ask questions."
Bruner and Bayless say they were never told when they authorized borrowing that some of the money was being used to paper over old debts. "There was never any indication to us, and it is something I never would have approved," Bruner says.
Whether Bruner, Bayless and the other supervisors truly knew what was happening, the ensuing debt speaks for itself.
"I think it is a lose-lose situation," says Moody's assistant vice president Chris Mushell. "I wouldn't want to be on the Board of Supervisors and say, 'Yeah, I knew it,' or say, 'I didn't know it.'"
@rule:
@body:Even as county supervisors were casting about for easy credit fixes, they apparently did not look at the most obvious source for boosting revenue--the County Assessor's Office.
While revenue paid to Maricopa County has steadily increased throughout the 1990s, the amount of money flowing into county coffers is nowhere near as great as it could be.
"The county has plenty of money, it's just not being picked up," says former supervisor Freestone.
But for the last dozen years, Maricopa County's attempts to collect its fair share of taxes from county property owners has been feeble, at best.
Since his election in November 1992, County Assessor Pete Corpstein has been trying to reform the agency responsible for raising 20 percent of the county's revenue. When Corpstein assumed office, he found it grossly understaffed, saddled with an antiquated computer system and hopelessly behind in assessing nearly a million parcels of property.
"We don't have the number of employees you really need to do the job," Corpstein says.
The staff shortage is ironic and foolhardy, because Corpstein's office offers the county its best potential source of increased revenue.
"I'm the only one who can get more money for them," he says.
Corpstein estimates there are 4,000 homes and 25,000 building additions that haven't been included on the county's property-tax rolls.
"We know we got property out we have to put on the rolls. We've got pictures showing it. It's no trick," says Corpstein.
Getting these homes and additions on the tax rolls would translate into about $1 million annually in new revenue to Maricopa County government and another $7 million to other local governments, including cities and schools, he says. But the problem, according to Corpstein, is a serious lack of manpower to process the paperwork, deal with a mountain of tax appeals and appraise hundreds of thousands of parcels of property each year.
Nearly 600,000 parcels are years behind in being reassessed to capture increases, or decreases, in their values. As a result, while the Maricopa County real estate market is roaring, the total value of county property, as listed by the county assessor, continues to fall. The county's assessed value on property in Maricopa County declined to $13.8 billion in 1993, down from $14.7 billion in 1991.
This decline represents a $19 million drop in property taxes owed to Maricopa County government, because the Board of Supervisors did not raise property-tax rates to compensate for the decline in assessed values.
Adding to Corpstein's problems is the county's cumbersome property-tax appeals system. Corpstein says at times, three-quarters of his 295-person work force is tied up handling 25,800 commercial property-tax appeals filed each year.
Many of the appeals are filed by tax consultants who overwhelm the Assessor's Office with paperwork. Corpstein says a high percentage of the appeals could be eliminated if the state required commercial property owners to provide proof of a property's value, such as a fire-insurance policy, rather than allowing tax consultants to present less-concrete valuations.
Many of these appeals, Corpstein says, are flagrant attempts by commercial property owners to cheat the county out of revenue. But because of staffing shortages, the tax assessor says, his office cannot adequately fight those illegitimate attempts to reduce the value placed on commercial land and buildings. And when the values are reduced, the county's tax income falls accordingly.
The bottom line is that Maricopa County and its political subdivisions are losing tens of millions of dollars annually in property-tax revenue because the Assessor's Office is understaffed and underfunded, Corpstein says. While this may produce a nice tax break for some property owners, particularly commercial property holders, it creates a disastrous financial situation for the county government.
The Board of Supervisors is finally beginning to address problems in the Assessor's Office, and has started considering the addition of employees and computer capacity. So far, however, Corpstein has been forced to borrow personnel and computer equipment from other county agencies.
And even if the county's tax-assessing and -collecting operation is reformed, there will still be tax-revenue problems at the county level. Those problems have been created by the State of Arizona.
@rule:
@body:While attempting, largely unsuccessfully, to deal with its internal problems, the County Assessor's Office also has watched as the state legislature and the Department of Revenue have stripped Maricopa County of huge amounts of its property-tax base.
Recent reductions in the assessed value of utilities, mines and railroads by the Department of Revenue, along with a legislative tax break for owners of rental property over the last three years, have already cut tax revenue due the county government by $10 million per year. (These state actions have cost local governments in Maricopa County $75 million in annual tax collections.)
The property-tax breaks for utilities mean an increase in taxes for other property taxpayers, particularly homeowners and nonutility businesses. In 1980, utilities, homeowners and businesses each paid about 26 percent of the state's property taxes. By 1992, the utilities share had dropped to 18 percent while those of homeowners and businesses had increased to 32 percent.
"It's a shift of taxes by the legislature, and it's hidden," County Treasurer Doug Todd says.
Consequently, any increase in Maricopa County property taxes forced by the current debt crisis will hit homeowners and businesses far harder than it will some of the county's largest taxpayers, including Arizona Public Service Company, U S West and several out-of-state utilities, Corpstein says.
While homeowners should begin bracing themselves for a property-tax jolt, utility companies are enjoying millions of dollars in property-tax reductions.
The biggest single beneficiary of the utility tax breaks in Maricopa County is the Palo Verde Nuclear Generating Station, which is more than 50 percent owned by out-of-state utilities (see story on page 22).
If the operators of the nation's largest nuclear generating plant were paying property taxes at the rate that utilities paid in 1979, Maricopa County's government would be collecting an additional $21.5 million per year, Corpstein says and public documents confirm.
The utility tax break was equal to 9 percent of the Maricopa County government's $236 million in property-tax collections last year and, if that break were eliminated, the increased tax revenue would go a long way toward patching the county's operating deficit.
The reduction in property taxes paid by utilities also directly impacts public schools, community colleges, flood-control districts, the library system and cities and towns within Maricopa County. All of these entities levy property taxes separately from county government.
While it remains to be seen whether county government will somehow avoid raising property taxes when rates are set in August, Todd says some of these other taxing districts--particularly school districts--almost certainly will try to recoup the loss of utility property-tax revenue by raising their tax rates.
The result will be rising overall property taxes for homeowners and small businesses, he says. And if county government must raise its property-tax rate to address its debt problem, the impact on homeowners and businesses will be even greater.
And the tax breaks for utilities are not over. Led by lobbyists from APS and U S West, whose former chief lobbyist is now Governor Fife Symington's top legislative aide, utilities won yet another round of property-tax reductions last month from the legislature. After the new legislative tax cuts are phased in over five years, utilities will see their property-tax bills to Maricopa County government drop by another $8 million per year, with about $6 million in reductions for Palo Verde alone.
"It's going to be difficult for the county to increase revenues with the [tax] changes the legislature has made," Todd says.
@rule:
@body:With the Assessor's Office years away from becoming an efficient revenue producer, and the county's property-tax base being continually eroded by the state legislature, the supervisors are once again turning to their favorite crutch to get them out of a financial bind: debt.
On April 18, supervisors listened to a fast-talking presentation by their outside financial adviser, Larry S. Given of Peacock Hislop Staley & Given, the firm that employs Bayless as a vice president.
Basically, Given was suggesting new ways the county could try to borrow its way out of trouble.
First, Given told the supervisors, they should refinance millions of dollars in general obligation bonds that were issued in 1986 for public works projects. Essentially, he was saying, the county could put off $25 million in bond payments due next year and use that money to cut its deficit. The $25 million, of course, would still have to be paid eventually.
Further suggestions under the Peacock Plan would have the county build a new, downtown administration building (at an unstated cost) to save $2 million to $3 million per year it now spends leasing private office space.
Given even suggested that the county should enter into a complex financing agreement that would, supposedly, allow it to reap up to $1.5 million by borrowing money against the potential savings from existing leases.
The supervisors ultimately voted to go ahead and refinance the general obligation bonds, but delayed a decision on the other components of the Peacock Plan.
The bond refinancing is a sign of the county's desperate straits, because it almost surely means that the county's bond rating will be lowered for the second time in a year.
The bond markets do not look kindly on governments that can't honor their bond obligations and divert money meant for capital improvements to operating costs, says Chris Mushell of Moody's Investment Services.
Mushell also says that bond raters will be watching closely to see if the county manages to balance its budget next year. If not, he says, the value of Maricopa County bonds may continue in a downward spiral that will hurt the county in two ways.
Even as the county needs to borrow more money, further downgrades in its bond rating will force it to pay more in interest to attract buyers for its bonds.
And the outlook for a balanced budget next year is bleak, according to Barbra Cooper, now the county's acting top administrator. Cooper says while many of the county's departments have already absorbed personnel cuts that will translate into lower budgets next year, several departments headed by elected officials--the Sheriff's Office, the County Attorney's Office and the court system--have not.
Cooper says she hoped that across-the-board personnel cuts would have trimmed $28 million from next year's projected $66 million deficit. So far, only 300 of the proposed 600 to 900 job reductions have occurred.
"We are going to have a problem," Cooper says.
