FY27 Proposed Budget

property tax exemption shifting the expense to cities, and while backfill support of $700,000 was committed through FY 2029, State projections indicate that funding may fall short. In 2023, new property tax reforms consolidated several levies and phase them out by FY 2029 if not sooner based on forced reductions that penalize taxable growth. In Iowa City, this means the former Library and Emergency property tax levies which totaled $0.47 per $1,000 of taxable property valuation and generated nearly $2 million in FY 2024 have been absorbed into the General Fund, creating more demand on limited financial resources. New and expanded tax exemptions for seniors and veterans from the 2023 legislation remove another $27.7 million in taxable valuation for FY 2027. The cumulative effect of these reforms is substantial and will not be fully realized until FY 2029. Despite this, another round of property tax reform appears certain, which means the City must be careful not to overcommit resources in FY 2027. The financial strain to City revenue is apparent and is exacerbated by macroeconomic forces. The City’s taxable valuation declined consecutively in FY 2023 and 2024 despite an overall growth in assessed valuations, and while this flipped to modest growth in FY 2025 and 2026, it has not been robust enough to sustain current service levels into the future. Similar trends are present in FY 2027. Because property taxes make up two thirds of General Fund revenue, it will be critical to monitor its health and maintain fiscal discipline to protect service delivery. Meanwhile, inflationary pressures and tariff volatility increase operating and capital costs and diminish purchasing power. Further budgetary pressures such as an economic recession or reductions in federal funding may impact service levels in the coming years. The City is grateful and encouraged by the voter approval of a 1% LOST that is expected to generate $14 million annually in new revenue. Not only will this allow an expansion of the City’s efforts to address key City Council priorities, but it also provides a sustained funding source for select proven programs piloted using American Rescue Plan Act (ARPA) dollars, and it allows critical relief to the strained General Fund which protects the City’s ability to continue providing core services. With this budget, LOST also facilitates a $0.20 reduction to the City’s overall property tax levy rate, which helps to offset the cost of two proposed utility rate increases that are necessary to ensure the health and stability of our water and wastewater enterprises. More details about the LOST allocation are provided in a subsequent section. The “Fiscal Year 2027 Budget Overview” section of this letter details the City’s tax and fee rates and debt strategy. For FY 2027, this includes a need to build capacity in the debt service fund with the assistance of LOST dollars to help the City maintain and expand critical investment in infrastructure in the face of diminishing purchasing power resulting from inflation affecting capital projects. However, the financial strategies in this budget are not adequate to meet strategic plan goals to increase the Emergency Fund balance by 5% annually, nor do they bolster the Facility Reserve, another strategic plan goal. While an unanticipated surplus in FY 2025 allows for contributions of $162,400 to the Emergency Fund and $5 million to the Facility Reserve fund, they are not systemic and should not be anticipated in the future. The Emergency Reserve Fund balance is projected to be nearly $5.6 million, and the Facility Reserve Fund will remain mostly depleted in FY 2027 after planned expenditures. The FY 2027 budget projects a $1.5 million decrease to the General Fund unassigned fund balance, about half the amount of the FY 2026

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