FY27 Proposed Budget

To the Honorable Mayor and City Council Members,

It is my pleasure to submit Iowa City's operating and capital budget for the fiscal year ending in 2027 (i.e. FY 2027). Although Iowa Code only requires formal adoption of an annual budget, we have included a three-year financial plan (FY 2026-2028) and five-year Capital Improvement Program (2026-2030) for planning purposes. Any future modifications to this budget will be fully disclosed through formal City Council action at public meetings, in accordance with State law. This budget aims to provide resources to deliver reliable and efficient municipal services, invest in critical infrastructure, further strategic plan priorities, and implement adopted master plans rooted in public input. The budget also contains prudent contingency line items and reserves which aid the City in weathering both unanticipated expenditures and revenue shortfalls. The FY 2027 budget was developed in a challenging economic environment driven by several compounding factors. Voter approval of a 1% Local Option Sales Tax, effective July 1, 2026, provides important flexibility in managing fiscal pressures, but careful financial decisions remain essential to ensuring the reliability of high-quality core municipal service delivery into the future. The City must exercise caution when considering any discretionary expenditure growth, particularly in recognition of strong state-level commitments to enact further property tax reform. The fiscal environment facing Iowa City remains challenging, though positive valuation growth and the new voter-approved Local Option Sales Tax (LOST) provide an improved outlook compared to FY 2026. Past State property tax reform legislation has stressed the City’s ability to deliver core services to a growing community while investing in value-add activities and external partnerships. At the same time, the City’s taxable valuation has failed to keep pace with inflationary costs of service delivery and infrastructure in recent years. Fortunately, the City has been able to navigate these challenges thanks to past financial decisions. The LOST will also allow both an expansion of efforts to address key City Council priorities, as well as bolster investment in infrastructure and public facilities and provide critical relief to the General Fund. However, the future remains uncertain. Additional property tax reforms are a clear priority for the Governor and State Legislature and federal funding support is increasingly unpredictable. As such, the FY 2027 budget responds to short-term needs while positioning for long-term stability. Iowa City’s current financial position is constrained by years of property tax reforms enacted by the State that significantly reduced taxable valuation, eliminated property tax levies, and increased exposure to volatile rollback rates. Beginning in 2013, State law reduced multi-family taxability from 100% of assessed value to the historically low residential rollback rate of 44.5% in FY 2027 which is the second lowest since it was established in 1978. The impact is particularly significant for Iowa City as multi-family properties are a significant portion of our tax base, resulting in a loss of tens of millions of dollars of City revenue while subjecting more than 80% of the City’s total valuation to the annual fluctuations of the residential rollback rate. Property tax reforms also lowered commercial and industrial taxability to 90% of assessed value, and state backfill payments that initially reimbursed the City for $1.5 million in losses have been fully eliminated. Subsequent legislation in 2022 converted the State Business Property Tax Credit to a partial Fiscal Environment

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