PHOENIX — The City of Phoenix closed out fiscal year 2025-26 with a general fund balance of $266.4 million, about $7.2 million more than projected, as the city prepares to build its next budget amid rising costs and economic uncertainty.
"Really good news this year. The difference, or the variance we call it, between what we'd estimated and where our general fund actually ended up is one of our narrowest variances in years," said Aaron Mertz, City of Phoenix Budget and Research Director.
According to the city council agenda, total general fund resources of $2,208.4 million exceeded estimates by $17.7 million, a variance of just 0.8 percent. The primary driver was higher-than-anticipated city and state-shared sales tax collections, including the impact of a 0.5 percentage point increase in the City Transaction Privilege Tax and Use Tax rates. Total general fund expenditures of $1,942 million came in $10.5 million above estimates, a variance of 0.5 percent, largely due to slightly lower-than-forecasted salary savings.
The $7.2 million surplus will remain in reserve while the city develops its 2027-28 budget.
"We'll put all those pieces together, including the $7.2 million, and again will come back to council in February with the general fund status to kind of say, now that we've crunched all the numbers, here's where we think we're at heading into 2027-28," Mertz said.
Mertz said last year, police, fire, and parks took the biggest shares of the general fund operating budget, a fact that drew attention from at least one council member.
"We love that books are balanced. However, I have some concerns about what is our highest invested department, because I believe through that budget process that's really reflecting what we value," said District 7 Councilmember Anna Hernandez.
Despite the surplus, city officials say significant budget challenges lie ahead. Rising employee benefit costs — particularly public safety pensions and healthcare — are among the most pressing concerns.
"Within the city, we obviously have to contend with challenges like increased benefit costs. You know, healthcare costs — I know that's one that nationwide is really challenging right now," Mertz said.
The city council agenda identifies additional budget pressures for 2027-28 and beyond, including negotiated labor increases, deferred maintenance and aging infrastructure, new ongoing operating costs from the voter-approved 2023 General Obligation Bond Program, and demands for new or expanded city services. The agenda also notes that Phoenix's public safety pension costs are expected to continue increasing, with updated pension rates from the June 30, 2026, actuarial valuation expected in December.
City staff have already begun a technical review process to evaluate spending at the line-item level and will conduct central expenditure reviews in December before presenting the 2027-28 general fund budget status and multi-year forecast to the City Council on February 23, 2027.
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