Council hears $2.7M projected gap and options at 2026 budget workshop

Lacey City staff presented a high-level 2026 budget preview at a Sept. 16 work session, telling the council the current projection shows a roughly $2.7 million general-fund gap and recommending a mix of one-time reserve use and structural steps to narrow the deficit.

City Manager Rick (City Manager, staff) opened the workshop with the headline figure: “Right now, the projected budget gap is about $2,700,000.” Staff said that figure reflects preliminary revenue projections and updated expenditure assumptions, and noted the city adopted the 2025 budget with a smaller deficit that staff has been managing through one-time adjustments.

Revenue assumptions and constraints Staff presented the primary revenue drivers and the constraints they see for 2026: sales tax (the city’s largest general-fund source) is forecast with zero nominal growth after a mixed recent pattern in retail and construction categories; property-tax projections depend on county-assessed values and the council’s decision whether to exercise the 1% regular levy increase; utility-tax and other locally controlled revenues show modest increases.

Chelsea Arwood, acting financial services manager, highlighted major grant and capital changes already in the 2025 amendment and forthcoming for 2026: state Recreation and Conservation Office grants and private contributions for park projects; a CDBG allocation for federal housing programs; and a planned meters purchase estimated at about $1.3 million (meters only). Arwood told council, “We’re purchasing new meters on the order of $1,300,000,” and clarified that the $1.3M covers meter hardware only and that installation labor will be a separate, phased cost.

Expenditure pressures Staff called attention to rising personnel and benefit costs and to an equipment-replacement shortfall in internal service charges. The city’s equipment-replacement internal fund uses an assumed inflation factor that staff said has not kept pace with market price increases; as a result departments face shortfalls when they replace vehicles and specialized equipment. Information-services and public-safety operating costs (including new police station O&M) were also called out as items that will increase the base budget.

Staff work and proposed steps City finance and department staff described a multi-part approach: (1) a line-by-line expenditure review that identified roughly $950,000 in recurring savings potential after rightsizing accounts and adjusting budgets to recent spending patterns; (2) proposed limited, one-time use of reserves (staff noted a $3.0 million policy reserve is available for bridging purposes); and (3) further work on potential revenue measures and program/service priorities to present to council in October and during formal budget hearings. Rick asked council for policy direction on a small number of questions, including whether to proceed with limited workforce additions targeted to utility project design and billing, whether the council would exercise the 1% property-tax lid lift, and whether to use reserves to smooth the 2026 budget while the city pursues medium-term revenue or expense changes.

Council reaction and next steps Council members asked detailed follow-up questions about the meter procurement timeline, staffing projections and trade-offs between growing services and preserving infrastructure. Staff scheduled the formal revenue hearing for Oct. 4 and a general budget public hearing for Oct. 18; the final adoption hearings are set for December. Staff emphasized that major composition changes — for example, shifting long-term maintenance funding back onto recurring revenues rather than reserves — will take time and careful policy discussion.

Why this matters Staff presented a snapshot showing constrained revenue growth and rising operating demands. The projected gap and the equipment-replacement shortfall underscore two recurring municipal challenges: limited growth in recurring revenue sources, and rising costs for personnel, benefits and specialized capital items. Council will need policy direction on whether to use one-time reserves, pursue revenue changes, or accept reduced service levels for recurring expenditures.

Ending Staff will return with more refined revenue scenarios and recommended policy options at October work sessions and public hearings. Council directed staff to provide more granular meter procurement timing and installation cost estimates, and flagged a desire to review capital and maintenance priorities alongside any proposed new investments.