Flush with millions of dollars of surplus tax revenue, Tempe will soon place a $70 million bet that developers will flock to its long-sought Rio Salado project. It's a wager Tempe taxpayers will have no say in.

Most city councilmembers, led by Mayor Neil Giuliano, are so confident that taxpayers support Rio Salado, they don't believe voters should be asked to approve a $40 million bond issue to finance construction of a 1.5-mile lake in the Salt River bed. The cost of the 25-year bond, including interest, will total about $71.25 million.

Over two decades, the lake is supposed to spur a $1 billion commercial, residential and recreational development on the shores of the river. The premise is simple: no lake, no development.

Giuliano says voter approval isn't needed before the city sells the bonds because Tempe isn't raising taxes to repay the debt. If the city were seeking a tax hike, Giuliano says, then voter approval would be appropriate.

"We are allocating existing resources, not raising taxes and not asking for new resources to make the payment up-front to allow the lake to be constructed," says Giuliano.

What Giuliano and other elected officials won't say is that the city already has raised taxes to generate the funds necessary to get the long-stalled project rolling. And the city is considering an additional 41 percent sales-tax hike later this year.

In 1993, voters approved increasing the city sales-tax levy from 1 percent to 1.2 percent to cover increased costs for fire, police and after-school programs for five years. But those programs only require about $2 million a year, leaving the city with an extra $5 million a year generated by the tax hike.

Much of that sales-tax surplus will be diverted to the city's Rio Salado financing plan, the centerpiece of which is the $40 million in bonds.

Repaying the principal and interest on the bonds will cost the city $2.85 million a year in the initial years of the project. That money will come right out of surplus tax revenue, says Patrick Flynn, Tempe's management services director.

The city also will be responsible for operation and maintenance of the lake, at an estimated cost of $2.35 million a year. This, too, will come from surplus funds. The combined bond repayment and operational expenses total $5.2 million annually, Flynn says. The city will foot these bills in the years immediately after construction of the lake.

Five years into the project, Flynn says, tax and special-assessment revenue generated by businesses locating within the Rio Salado development area should contribute about $2.6 million annually to bond repayments and operational expenses. The city's goal is to have the new businesses eventually pay all lake construction and operations costs through sales taxes and special assessments.

But the city has not projected when businesses will assume the full share of the cost or when they will repay the taxpayers' up-front outlays. Taxpayer expenses and revenue contributions from Rio Salado businesses have not been projected beyond the first five years, Flynn says.

The size of the project and uncertainty over taxpayer exposure worry some community leaders.

Former councilmember Barbara Sherman says Tempe citizens have always been told they wouldn't be taxed for Rio Salado, but that now appears to be the case, at least in the initial years.

"The community really should have a say in what they want in Rio Salado and how much they are willing to pay," she says.

Only one Tempe councilmember wants voters to approve the $40 million in bonds. "It's a good idea to go to voters," says Councilmember Joseph Lewis, who raised the issue this month when the council voted to direct city staff to continue work on the Rio Salado financing plan. A supporter of Rio Salado, Lewis received no support from other councilmembers to send the bond proposal to voters.

"I was told in no uncertain terms that the rest of the council didn't agree with me," Lewis says.

The council's position, Lewis says, is that since the city isn't requiring "anything special to finance Rio Salado," there is no reason for an election.

"The point is, we still have to give up on the other projects we normally may have done if we were not investing in Rio Salado," Lewis says.

One of those projects appears to be a mass-transit improvement plan. With existing sales-tax revenue diverted to the lake, the council is reviewing a Tempe Chamber of Commerce proposal to hike the city sales-tax levy another half-cent--to 1.7 percent--to cover mass-transit expenses. The issue is expected to be on the ballot this fall, says Tempe vice mayor Dennis Cahill.

Tempe's Rio Salado Project is the latest in a series of plans--the initial was drafted 29 years ago--to return water to the once-free-flowing Salt River. While the idea is appealing, the impracticality of building in a flood plain and the expense were too much for voters, who rejected versions of Rio Salado promoted by Phoenix in the 1970s and by Maricopa County in 1987.

Although county voters in 1987 rejected Rio Salado by a 2-1 margin, Tempe voters narrowly favored it, and that local support inspired Tempe leaders to forge ahead.

The cost of Tempe's Rio Salado project has escalated rapidly--jumping from $15 million three years ago to $30 million two years ago to $40 million today. And that's just to build the lake. Another $26 million would be spent on infrastructure and to move utility lines.

The design of the lake and the water source have evolved as costs go up. The lake will be created by two 300-foot-long inflatable dams; one east of Hardy Drive and the other near McClintock Drive. The dams would be deflated during times of high river flows.

The lake would primarily be filled with water from Salt River Project canals. The city would repay SRP by pumping treated sewage water into the aquifer. Water that seeps through the bottom of the lake will be captured from wells and circulated back into the 180-acre lake. The electricity cost for the circulation system is estimated at $500,000 a year.

Additional water to replace evaporation losses--estimated at up to four million gallons per day in the summer--will come from polluted groundwater that will be treated before being dumped into the lake, says deputy community development director Dave Fackler.

The polluted water will be drawn from the Indian Bend Superfund site, Fackler says. The pollution was caused, in part, by chemicals generated by the Motorola plant in Scottsdale. The chemicals will be separated from the water through air-strippers, which essentially cause the chemicals to evaporate into the air.

The next step in the Rio Salado financing plan calls for potential developers to give their views of the plan. John Benton, a Tempe developer who has signed a development commitment with the city for a $500 million mixed-use project in Rio Salado, says the city's financing plan looks good. Benton plans to build apartments and condominiums in the first phase of his project.

Even though Tempe is fronting the construction cost of the $40 million lake to attract top developers--and plans special assessments on development--the city also is prepared to offer sales- and property-tax abatements to lure builders, says Giuliano.

"Those are rather routine economic development tools," Giuliano says.
Any tax rebates offered to developers will lengthen the time taxpayers would cover bond repayment and operating cost of the lake.

The first-term mayor downplays any economic risk to the city. He says the bonds won't be sold until developers commit to enough building to generate at least $1.2 million a year in tax revenue.

"I would say this is a low-risk venture," Giuliano says.
But longtime council critic Art Jacobs says the project is certain to increase the burden on Tempe taxpayers. Jacobs, a retired Department of Defense budget analyst, says that in addition to the boost in Tempe's sales tax (which applies to food), Tempe's property taxes have risen steadily over the past seven years. Jacobs also questions the city's motivation for the 1993 sales-tax boost.

"I'm really beginning to believe the sales-tax increase was a hoax to get money to fund Rio Salado," he says.

Jacobs says the city shouldn't be involved in Rio Salado development.
"If Rio Salado is as good as the city says, then the developers will build it," Jacobs says.

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John Dougherty
Contact: John Dougherty