The Economics of Sedona
The Red Rock formations in the Coconino National Forest are, without a doubt, the primary economic driver for Sedona. People come from all over the United States and the world to view, hike, take pictures of, and generally bask in their stark beauty. Sometimes, those same people end up purchasing primary or secondary homes because of their first visit to the Red Rocks. Perhaps, at some point, they move here permanently.
Tourism is the primary revenue stream for the City. There is no property or personal income taxes. There is a 3.5% sales tax and a 3.5% bed tax. Groceries are not taxed in Sedona, although prepared food you might purchase in a grocery store is taxed. Bed tax is collected from both traditional hotels and short-term rentals. Traditionally, it has been estimated that residents do not pay more than 30% of the sales tax revenues collected. The amount of bed tax attributable to residents is considered negligible and so no part of the revenues generated by bed tax is considered to be paid by residents.
These funds are used to maintain and improve the infrastructure of a small town, surrounded by National Forest, that on any given day may contain more than 10,000-20,000 visitors (roughly 3 million visitors per 365 days), in addition to our resident population of 5,000-10,000, with a commensurate increase in vehicles. At the same time, the funds are also being used to maintain and improve the quality of life for all of us.
Economic Diversification
Economic diversification was one of the four core priorities for FY2027, behind Community, Housing and Transportation.
Economic diversification, however, is difficult when we, as a community, are unwilling to allow resource intensive industries, such as chip manufacturing and datacenters, into our community. And, in my opinion, pushing back on resource intensive industries is a right and proper "no way!".
We are also land constrained as we are bounded by the Red Rocks and Coconino National Forest. There are only two large parcels of City owned land: the Dells, which is currently unavailable, but having asked for and received both a geological and pollution report indicating it is buildable and does not require remediation, we could consider starting a master plan once we know how much land will be available once the injection wells are completed and where that land is located on the site.
The other large parcel of land is the Western Gateway. A recent survey indicated that the best use for the land would be community event space, such as for festivals, community shared space, like a commons area, and a recreation center. The fourth place was an amphitheater. Council has not yet discussed the top three community uses, but with those uses, the Sedona Film Festival new buildings and possibly an amphitheater, would use the vast majority of the space. Once there is a master plan, it will be better understood as to spacing, but no commercial building will happen there. Western Gateway will be a community space and a tourism space, so no economic diversification will happen there.
There have been suggestions that perhaps we could start an innovation center. Remembering there is no personal income tax and if no product is sold, then there are no sale tax earnings to offset the cost of the building, maintenance and utilities. Much more thinking is required on this topic. Let's keep talking.
Base Budgeting
Under Home Rule, the community must vote every 4 years to determine whether to keep Home Rule, switch to Base with annual Base Adjustments or change to Permanent Base Adjustment. To make a good decision, you first need to understand the different ways Arizona state law allows municipalities to spend the monies earned from taxes and fees. Note, however, that the FY27 budget will be set in June and go into effect on 1 July 2026. Whether Home Rule is voted back in or not, the FY27 budget is not impacted. Further note: regardless of the budgeting system, the budget can never exceed the taxes and fees earned. Further, all required funds must be fully funded by law.
So, Base.
In 1980, the Arizona State Legislature created these various budget cap methods. Base is determined by the population of the community at the time the law was implemented and then allows for an inflationary amount and community growth. For Sedona, the Base amount would be around 15 million dollars. On top of this, any outstanding debt must also be paid, so Sedona may end up with a budget around 30 million dollars, but only 15 million could be spent on required government services.
The required government services are listed as:
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Wastewater
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Community Development (planning and permits)
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City Administration (clerk, public works facilities, municipal court)
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Public Safety
The following departments and services would only be funded if there was anything left of the 15 million dollars after the above departments and services are financed, or with an annual based adjustment ballot:
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Emergency Management
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Housing
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IT and GIS
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City Attorney
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Parks and Recreation
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Transportation and Mobility (shuttles, shared use paths)
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Service Contracts (Library, Humane Society, Community Center, Recycling Center, Verde Valley Caregivers, Hope House)
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Small Grants Program
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Arts Grant Program
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Tourism Department
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Sustainability Department
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Short-Term Rentals Management
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Arts and Culture department (arts in public spaces, arts in the classroom)
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Capital Projects beyond wastewater
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City Manager's Office
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Communications program
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Human Resources
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Financial Services
Once a year, in May, a special election could be held (cost is around 40 thousand dollars) to adjust the Base for upcoming budget year. While the Council may direct Staff to indicate what will be paid for with the adjustment, it is not a line-item veto. There is no legal way in Arizona to place an initiative on the ballot allowing the community to pick and choose what will be funded. We would vote yes or no for the full amount. This allows the city the flexibility to change how the funds are used should something unexpected happen.
Under Base, the city would have to run an adjustment ballot every year if more funding was required. All monies earned from fees and taxes must remain in the bank as they are untouchable as they exceed the budget cap set by law.
Permanent Base Adjustment
The Permanent Base Adjustment (PBA) is exactly what it sounds like: it is a budgetary cap created by taking the Base and then extending it to a voter approved permanent adjustment. The purpose of a PBA is to allow greater access to funds already collected via taxes and fees for use in supporting the needs of the city, without having to run an adjustment election every year.
Typically, the formula used is [original base limit + proposed increase] X Population Factor X Inflation Factor. Many municipalities use PBA. Scottsdale has a PBA of 885,000,000 (million) dollars. Tolleson has a PBA of 321,000,000 (million) dollars.
I am not opposed to a PBA that is sufficient to effectively run the City and meet the needs of residents. I would vote for Home Rule with an understanding that a PBA be prepared for the 2028 election. This allows the city time to determine the amount to be placed on the ballot and to explain why that amount will be sufficient for 10-20 years.
Alternative Expenditure Limit: Home Rule
Alternative Expenditure Limit, AKA Home Rule, is a voter approved mechanism allowing a city/town to set its own annual spending cap for local revenues (sales and bed tax + fees for Sedona), instead of being bound solely by the state-imposed constitutional spending limits. In other words, once the required reserves have been funded (which we have routinely over-funded every budget year), the city can spend the monies it is projected to earn. This allows the city to do things like build a recreation center (depending on the cost), maintain and operate it and subsidize resident fees every year without potentially acquiring debt or being unable to fund the costs of maintenance, operation and subsidy without asking for an annual base adjustment. Or expand the hours of the On Demand shuttle without asking for an annual base adjustment. These large ticket expenditures for capital projects, vehicle purchases and labor contracts may even overwhelm a PBA amount overtime, requiring a PBA increase ballot initiative.
Again, none of these budgetary methods allow voters a mechanism to vote on approval of any specific project, regardless of its cost. The city must use other means to determine interest in projects, such as budget surveys or a budget community conversation.