City finance leaders told the Sioux Falls City Council on July 15 that a shortfall in sales-tax growth and the state’s newly enacted property-tax growth cap will reduce future city revenues and that staff will begin budget recalibrations as part of the 2026 budget process.

Why it matters: The city relies on a mix of property taxes and a first-penny sales tax to fund core services such as police, fire, streets and parks. Finance staff said the sales-tax slowdown and a cap on growth that limits how much new construction can raise property-tax revenue over the next five years will depress revenue growth and put pressure on reserves and future budgets.

Director Sean Pritchett and Budget Officer Tim Kanda described the immediate position and near-term projections. Pritchett said the recently enacted Senate Bill 216 places "a cap now on growth for the next 5 years," which the city models as a 3% cap on growth. He explained that "growth" for city budgeting refers to new construction added to the tax base rather than market-driven reassessments of existing homes.

Kanda said city revenue performance through June was close to budget expectations overall but that sales tax is the primary source showing a lag. He said the city currently expects to come in about $3.8 million below sales-tax budget expectations for 2025 but that other revenues (permits and higher-than-budgeted interest income) and one-time budget savings are offsetting most of that shortfall this year. Kanda reported projected interest income of roughly $4 million compared with a $2 million budget, and he said building valuations have stayed near $1.1 billion in recent years (generating roughly $3.6 million in permit-related revenue).

On reserves, Kanda said the city's general fund reserves stood at about $81.1 million on Jan. 1, 2025 and that the council’s policy target is 25% of the expenditure budget (about $62 million). He noted that with current projections and a proposed one-time $5 million loan to the airport (to be repaid later), the city expects to end 2025 near the $81 million range — roughly $20 million above the 25% policy minimum but that the SB 216 effect reduces projected future reserves if not addressed.

Pritchett presented a 10-year outlook that models the SB 216 cap against the city's historic average property-tax growth (historically around 3.5%–4%). He said the city’s conservative estimate of lost revenue from the cap is roughly $26 million over 10 years under the model used at the meeting and that the effect grows over time because future revenues compound off a smaller base. Pritchett said that without recalibrations the city’s reserves could drop below the 25% policy threshold earlier than previously forecast.

Despite the warning about future impacts, staff recommended not cutting planned 2025 sales-and-use-tax capital expenditures now. They told the council they believe available buffers — one-time savings, deferred bond payments this year, and higher investment income — provide a $5 million cushion at a 1.5% sales-tax growth scenario and a larger cushion if sales taxes recover to 3%.

Councilors asked specific questions about options and constraints. Councilor Spellberg asked about tax and permit consequences if the state built a large project in the city; staff said such projects generally do not generate property tax for the city if owned by the state and that sales-tax effects would be primarily indirect. Councilor Thomason asked about taxing medical cannabis; staff said medical products are generally treated like other medical items for tax purposes and that the city lacks clear local authority to create a new tax without state authorization. Councilor Bassey asked whether the SB 216 cap affects tax increment financing (TIF); staff said TIF was generally excluded from the cap calculation but officials are working with county equalization staff to clarify implementation.

No formal council action was taken during the July 15 presentation; staff said the 2026 budget will be released the following week and that budget recalibrations and recommended adjustments would come through the regular budget process.

Numbers and clarifications reported by staff at the meeting: general fund reserves about $81.1 million as of Jan. 1, 2025; 25% policy target ~ $62 million; estimated sales-tax shortfall ~ $3.8 million for 2025; projected additional interest income ~$2 million above budget ($4 million projected vs. $2 million budget); building valuation trend near $1.1 billion and permit revenue roughly $3.6 million; staff-estimated 10-year revenue impact from SB 216 roughly $26 million (model-based).