FY26 Proposed Budget

The 2013 legislation also introduced a rollback for commercial and industrial properties which reduced the taxability of that property class from 100% to 90% of assessed value. Unlike multi family properties, the State “backfilled” this loss by providing approximately $1.5 million in revenue to the City each year. However, the State passed legislation in 2021 to phase out backfill payments over the following five years. For FY 2026, Iowa City expects to receive approximately $308,000 before backfill payments are fully eliminated in FY 2027. In 2022, Iowa passed another property tax law which converted the Business Property Tax Credit to a partial property tax exemption. To help local governments adjust to this change, the State budgeted for additional local government backfill payments equal to approximately $700,000 annually through FY 2029. However, the State’s Legislative Services Agency projects that available funding for this backfill will fall short and incrementally reduce local government revenues. Another round of significant property tax reform was adopted during the 2023 legislative session. These changes consolidated several property tax levies into a Combined General Fund Levy and phases them out by FY 2029, if not sooner based on annual taxable valuation growth caps. In Iowa City, this affected the Library and Emergency property tax levies, which provided nearly $2 million in operating revenue as of FY 2024. Unless a reduction in service is desired, this loss in annual revenue must be absorbed into the General Fund. The 2023 reforms also expanded the Senior Homestead Tax Credit and created a new Military Service Exemption, which are estimated to reduce the City’s total taxable valuation by over $27 million in FY 2026. Despite overall assessed value growth, the City’s taxable valuation declined in consecutive years in fiscal years 2023 and 2024 as impacts from legislative reforms and state-mandated valuation rollbacks outpaced taxable growth. Even modest positive growth experienced in fiscal years 2025 and 2026 are insufficient to sustain current service levels in the long-term. The financial strain from these challenges is exacerbated by macroeconomic forces including inflationary and labor supply pressures that are increasing operating and capital expenditures and diminishing the City’s purchasing power. Further budgetary pressures, such as additional property tax reform measures or an economic recession, could accelerate what is likely to be unavoidable impacts to service levels in the coming years. This risk of diminishment of public service levels is only heightened by increasing demands for service as our population continues to grow. The cumulative impact of the past property tax reforms will not be realized until FY 2029. Even so, property tax reform remains a stated top priority of the State Legislature. Impacts of said efforts are expected to be most pronounced on the General Fund, which provides for critical services such as Police, Fire, Parks and Recreation, Senior Center, and Library. Overall, property taxes make up around two thirds of General Fund revenue. It will be critical to keep a close eye on the General Fund over the next several fiscal years and consider expenditure reduction measures before the full impact of reform is realized. This budget maintains a flat overall property tax rate and adopts several rate and fee increases to ensure fiscal health and stability. The “Fiscal Year 2026 Budget Overview” section of this letter details the City’s tax and fee rates and debt service strategy. The FY 2026 strategy highlights the need to continue building capacity in the debt service fund to maintain and expand critical

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