Oro Valley Adopts $128M Tentative Budget as Sales Tax Posts Steepest Drop in 15 Years

ORO VALLEY — The Oro Valley Town Council unanimously approved a $127,990,000 tentative budget for fiscal year 2026-27 at its June 3 meeting, even as finance staff warned that local sales tax revenue has fallen 6.8% year-over-year — the steepest single-year decline in more than 15 years of town records. The council voted 7-0 on all four major action items during the roughly two-and-a-half-hour session.

Adopted as Resolution (R)26-31, the tentative budget represents a $23.5 million decrease from the current year's adopted budget and a $2.1 million decrease from Town Manager Jeff Wilkins' recommended budget. Chief Financial Officer David Gephart presented the figures, noting the general fund totals $55 million — an increase of just 0.7% from the prior year's adopted budget, well below the current inflation rate. The budget is structurally balanced with ongoing revenues covering ongoing expenditures, and the town's general fund reserve is projected to end the current fiscal year at $16.7 million, exceeding the council's 25% reserve policy by approximately $4 million. The state-mandated spending limit for the coming year is $179,800,000, leaving the town well within that cap. Final budget adoption is scheduled at an upcoming council meeting.

The council also directed staff to add quarterly capital improvement project updates to public council presentations, at the request of Council Member Mary Murphy. Town Manager Wilkins confirmed that CIP financial updates are already distributed quarterly alongside monthly financial reports and that directors would be available at those public sessions to address project status questions.

Construction Tax Collapse Drives the Slide

Deputy Finance Director Gomez presented the town's third-quarter financial update through March 2026, disclosing that combined local sales tax revenue — spanning both the general fund and community center fund — totaled $21,347,000 compared with $22,901,000 in the same period last fiscal year, a 6.8% drop. Gomez said the decline surpasses all previous single-year contractions in the town's data set, including a 5.8% drop during the 2011 recession, a 1% dip in 2020, and a 2.7% decline in fiscal year 2025.

Construction sales tax led the deterioration, falling nearly 50% year-over-year. Gomez attributed the slide partly to a significant spike in residential building activity during and immediately after the COVID-19 pandemic that accelerated the town's approach to build-out, leaving less residential construction activity in subsequent years. Utilities sales tax is down approximately 3%, restaurant and bar revenue is down roughly 2%, and retail is up only 0.5% against a historical average of 4% annual growth. Remote seller — online sales tax — was the sole bright category, rising 17% year-over-year. Local sales tax and state-shared revenues together account for approximately 86% of general fund revenues, Gomez noted.

Vice Mayor Melanie Barrett pressed staff on whether construction sales taxes from the Oro Valley Marketplace apartment development had yet been collected and reflected in the figures. Gomez confirmed that only a portion had come in through March, with the bulk expected to arrive later in the fiscal year and potentially spill into fiscal year 2027, consistent with the timing of contractor payment schedules. Barrett argued the gap between rising permit fees, rising impact fees, and falling construction sales tax is primarily a timing issue rather than a structural loss. Despite the shortfalls, year-end estimates project the general fund will come in approximately $100,000 under total budget, aided by $1.2 million in projected personnel savings and additional operations-and-maintenance efficiencies.

Council Approves Water Rate Increase of $1.86 Per Month for Most Customers

Following a public hearing that drew no speakers, the council voted 7-0 to approve Resolution (R)26-29, raising the potable water base rate for five-eighths-inch meters — used by 84% of customers — from $23.31 to $25.17 per month, an increase of $1.86, or 3.6% when combined with unchanged commodity charges at average consumption. The new rates take effect July 1 and will appear on bills beginning in August.

Water Utility Director Peter Abraham said the increase is driven by approximately $900,000 in rising operating costs, broken down as roughly 17% personnel, 15% operations and maintenance, 4% power, 22% for the new Northwest Recharge, Recovery and Delivery System delivery fee, 22% for Central Arizona Project wheeling charges paid to Tucson Water, and 22% for CAP delivery charges to recharge and recovery facilities. Abraham said the utility is proposing a base-rate-only increase — rather than a split between base and commodity rates — because cash reserves are near their minimum threshold and a guaranteed revenue floor is needed. He projected that with the increase, the utility's cash reserve will stand at $4.7 million against a $3.7 million requirement, a surplus of just under $1 million. No increases were proposed for reclaimed water rates. At the current rate, Oro Valley customers using 7,000 gallons per month would pay $53.31, compared with $60.12 in Marana, $60.90 for Metro Water, $61.31 inside the City of Tucson, and $68.97 outside Tucson city limits.

Council Member Josh Nicolson raised concerns about potential CAP allocation cuts, noting that Abraham had been informally advised to prepare for a 20% reduction beginning in January, though no official Bureau of Reclamation determination has been issued. Abraham said a 20% cut would primarily reduce the amount of water the town is able to store, not the amount delivered to customers, and that the utility's diverse water resource portfolio leaves it well-positioned. Nicolson warned the public that fixed infrastructure costs remain constant regardless of allocation size, meaning cuts effectively increase the per-unit cost of water delivered.

PSPRS Police Pension Fund Now 101% Funded; Excess Contributions to Continue at Reduced Level

The council voted 7-0 to adopt Resolution (R)26-30, approving a revised Public Safety Personnel Retirement System pension funding policy for fiscal year ending June 30, 2027. The town's PSPRS plan holds an actuarial asset value of $91.2 million against an actuarial accrued liability of $90.27 million, producing an overfunded position of $903,000 and a funding ratio of 101% as of June 30, 2025 — up from 98.6% the prior year. The plan's investment yield was 11.1% last year, 9.7% over three years, and 10.5% over five years, each exceeding the assumed 7.2% earnings rate.

Under the adopted policy, the town will continue making excess contributions next fiscal year but will reduce them to the difference between the current employer contribution rate of 12.61% and the actuaries' recommended rate of 10.47% — a differential of 2.14%, or approximately $214,000. The town issued $17,980,000 in pension obligation bonds in fiscal year 2022 and made a simultaneous $10 million one-time reserve payment, converting the liability's effective interest rate from 7.2% to 2.39%. Gephart calculated those actions have produced savings of approximately $856,000 per year over the first four fiscal years, totaling roughly $3.4 million to date, net of debt service costs. Prior to those actions, the employer contribution rate stood at approximately 43%; the actuaries' proposed rate for next year is just over 10%. The principal outstanding on the pension obligation bonds as of June 30, 2025, was approximately $15 million.

Vice Mayor Barrett asked whether the relatively modest excess contribution proposed indicates staff does not expect a large actuarial spike from the recently negotiated memorandum of understanding that increased police wages. Gephart said the pool of Tier 1 and Tier 2 employees subject to that spike has been reduced by retirements and DROP enrollments since a similar spike was recorded in fiscal year 2023, and that he does not anticipate the impact will be as significant, though the new actuarial report will not be released until December.

Also discussed:

The community center fund is projected to end the year with approximately $1 million in fund balance, with contracted golf operations expected to generate net income of approximately $615,000 and total fund revenues tracking about $1.7 million over budget, driven by strong membership dues and public play.
The highway fund is expected to end the year with a fund balance of approximately $2.2 million, with capital savings of roughly $1.5 million largely due to project carryovers and adjustments following passage of RTA Next.
The water utility fund is expected to use approximately $2.3 million in fund balance, leaving a projected year-end balance of roughly $6.7 million, aided by a federal WIFA grant and bond proceeds.
Bed tax revenue is down 14% year-over-year through March; staff confirmed the town is working with the Arizona Department of Revenue to collect back taxes from one hotel, which has paid through December but still owes the remainder of the fiscal year.
The consent agenda passed 7-0.
The council voted 7-0 to adjourn at 8:41 p.m.