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1. Expenditure limitation basics and penalties for exceeding the limitation

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1. How is the expenditure limitation determined for a city or town?

The Constitution required the Economic Estimates Commission (Commission) to establish for each city and town a base limit from actual expenditures of local revenues for fiscal year 1980. For cities and towns created after fiscal year 1980, the Commission determines the base limit as described in A.R.S. §41-563(A)(6).

Each year, the Commission calculates the constitutional expenditure limitation for all cities and towns in accordance with A.R.S. §41-563 by adjusting their base limits for population and inflation changes since the base year, and any voter-approved permanent base adjustments or annexations, as applicable.

2. Are there any provisions that allow a city or town to alter its constitutional expenditure limitation?

The Constitution provides cities and towns several voter-approved options to alter their expenditure limitations. These options include exceeding the expenditure limit for 1 year (one-time override), permanently adjusting the base limit used to calculate the expenditure limitation (permanent base adjustment), or a temporary alternative expenditure limitation (home rule). See the voter-approved expenditure limitations FAQs for detailed information on these constitutional provisions.

3. Are all expenditures subject to the limitation?

No. The expenditure limitation applies when a city or town spends local revenue, as defined by Arizona Constitution, Article IX, §20(3)(d). Generally, local revenues include all monies a city or town receives such as tax revenues, fines, fees, or charges for services; however, the Constitution excludes some monies such as grants and aid from the federal government and certain revenues received from the State from the local revenue definition. Cities and towns must consider the source of the money used to make payments to determine its expenditures subject to the limitation. For a detailed explanation of expenditures not subject to the limitation, see the instructions for UERS forms—Part II. In addition, see the Part II—exclusions and carryforwards FAQs for further information about calculating and tracking excludable revenue amounts.

4. What is the penalty for exceeding the expenditure limitation?

In accordance with A.R.S. §41-1279.07(H), a city or town that exceeds its expenditure limitation without authorization will have the following amount of State income tax (urban revenue sharing monies) withheld based on the percentage of the excess expenditures:

1. If the excess expenditures are less than 5 percent of the limitation, the amount withheld is equal to the excess expenditures.

2. If the excess expenditures are between 5 percent and 10 percent of the limitation or are less than 5 percent of the limitation but it is at least the second consecutive instance of excess expenditures, the amount withheld is equal to 3 times the excess expenditures.

3. If the excess expenditures are equal to 10 percent or more of the limitation, the amount withheld is equal to 5 times the excess expenditures or one-third of its allocation of State income tax, whichever is less.

Before State monies are withheld, the Arizona Auditor General must hold a hearing to determine if the city or town has exceeded the expenditure limitation without authorization. To ensure due process, the city or town representatives are invited to attend and participate in this hearing. The State Treasurer withholds the penalty in the fiscal year following the Arizona Auditor General’s hearing.