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Tucson updates FY26 budget outlook; health plans face near-$10 million shortfall
Summary
City staff told the mayor and council that rate-and-fee increases and federal grant uncertainty affect the FY26 budget, and projected medical plan costs for next year create nearly $10 million in funding pressure for two city health plans; staff proposed plan-design changes and an HSA incentive as options.
City of Tucson staff gave the mayor and council a sweeping FY26 budget update on Feb. 19 that paired routine rate-and-fee adjustments with warnings about federal-grant uncertainty and sharply rising city health-insurance costs.
Business Services Director Angel Ozomolam said fee changes already approved for planning and development services, fire and transportation will take fuller effect on July 1, FY26, and that the city expects the approved permit-fee increases to produce about $400,000 in additional revenues. Ozomolam also said a second-phase planning-and-development permit valuation assessment is expected to add about $133,000 in the first year.
Ozomolam warned the council that some fund-specific increases are restricted to their originating funds: “These are not revenues that are able to be reallocated to other needs of the city,” he said, explaining that water and permit fee revenues generally must remain in those utilities and programs.
On federal funding, staff said the city currently holds about $617.5 million in active federal awards with an unspent balance of roughly $283.9 million spanning multiple years. Staff said about 200 city positions are funded directly by federal grants and that a federal pause on certain grant disbursements could put grant-funded jobs and programs at risk; departments most exposed include police, fire, housing and community development, and transportation.
Health benefits drove the largest portion of the staff presentation. The city’s health-benefits team and its consultant told the council that the three-city medical plan portfolio shows divergent funding positions. The health savings account (HSA) plan was reported to be in a favorable position with an estimated surplus (the presentation: “a funding surplus of $2,600,000”), while the network plan and the health reimbursement arrangement (HRA) plan are projecting material cost increases. City staff used a planning assumption of 8.5% annual medical-cost inflation but said experience in the most recent 12 months has exceeded that for two plans, particularly driven by prescription-drug spending.
Staff presented plan-level projections showing that the network plan could require a 20.1% increase in funding next year and the HRA plan a 22.9% increase, with the combined shortfall for those two plans reported in presentation materials as about $9,900,000. Because the HSA plan is in surplus, the overall portfolio headline number in the city’s financial model masks that two-plan gap: staff said the five-year model assumes roughly $4.8 million of budgeted health cost growth in FY26 but that projected plan-specific needs could be about $9.9 million, creating a “math problem” to resolve before final budget adoption.
The employee benefits committee has already identified a menu of options staff will present to council on March 4. Those options include plan-design changes for the network and HRA plans (higher deductibles, increased coinsurance, adding a specialty- or tier‑4 coinsurance for retail specialty drugs) with estimated savings ranges presented, shifting a portion of premium cost to employees, targeted outreach to move members into the lower-cost HSA plan, and potential one-time uses of opioid-settlement or other restricted funds to cover specific gaps. Staff signaled they plan to present a city manager recommendation on March 4 and stressed the need to finalize plan changes ahead of employee open enrollment in May.
Councilors asked for more plan-specific detail and historical trend data (FY23–FY25) to understand the methodology behind the revenue projections and plan-cost estimates. Staff agreed to provide backward-looking and forward-looking trend tables and additional detail about the drugs and cost drivers that are producing the spike in specialty-drug costs.
What’s next: staff will return March 4 with the city manager’s formal recommendation on health-plan changes so the council can give a final indication before open enrollment materials are produced.
