Lacey officials report modest first-quarter variances, warn of 2026 budget gap driven by rising labor costs

Lacey — City finance staff told the Lacey City Council on June 10 that the city’s first-quarter financial results for 2025 showed few surprises, but rising labor costs and softer tax and investment returns increase pressure on the 2026 budget.

Troy Wu, Lacey’s finance director, said the city spent about $838,000 more in the current expense fund through the first quarter and that labor costs accounted for the bulk of the increase: "a 770 $767,000 increase to the cost of labor," Wu said. He also reported that general-fund revenues were about $587,000 lower through the first quarter compared with the same period in 2024, driven largely by weaker plan‑check fees and lower investment valuations.

The report matters because taxes and wages together account for most of the general fund. "Taxes make up about 68% of all general fund operating revenues," Wu said, while the cost of labor historically represents roughly two-thirds of operating expenditures. The finance team’s model projects a nearly $4.7 million structural deficit for 2026 under current assumptions.

City staff framed the numbers and modeling assumptions for council. Highlights included: sales tax collections of about $6.4 million for the five-month reporting window, down roughly $272,000 versus the same period last year; a five‑month drop in interest earnings of about $240,000 (partly the result of transfers to capital funds such as the police station); and utility revenue increases (water about $547,000; wastewater about $354,000; stormwater about $68,000) tied to rate changes. Wu said a roughly $400,000 non‑cash market valuation adjustment also depressed reported revenues.

On expenditures, staff reported the general fund was about $1 million higher year to date, with the public‑safety fund up roughly $592,000 funded by a voter‑approved countywide public‑safety sales tax. Wu cautioned that one major labor group remained unsettled in 2025 and that retroactive pay could increase labor costs further. "Labor may be as high as 3,500,000.0 higher in '25 than '24," he said as a straight‑line projection inclusive of pending settlements.

Rick (City Manager) summarized the staff view on the 2026 outlook and the budget process, urging a combination of cost management and revenue strategies. He said staff will bring proposals to council this summer and early fall, including possible fee and convenience‑technology updates in August and additional revenue options such as business‑and‑occupation or gambling‑tax changes in September. "It's gonna be another tough, budget year," Rick said.

Staff described the assumptions embedded in the five‑year model: no sales‑tax rate increase in 2026 with 2% annual growth in later years; $150 million in new construction value assumed for property‑tax calculations in 2026 and $75 million in subsequent years; a 4% annual salary escalation assumption (below the 10‑year average of 7.2% used for context); 6% annual benefit increases; 3% general inflation; and a conservative 100% of authorized budgets spent for modeling. Wu reminded council that those are modeling inputs and that some assumptions (for example, salaries and benefit trend lines) have historically been higher.

Council members asked staff for clarifications about comparability with peer cities, the market sources for the investment valuation, and whether the reported paper losses would affect cash. Wu said the market adjustments are non‑cash and only realized if investments are sold prior to maturity. On labor competitiveness, staff said they maintain market‑survey data and that the city remains competitive in its peer market.

Staff also identified several known long‑term obligations that will affect future budgets, including operating and maintenance for new facilities (an estimated $162,000 per year for the planned park Phase 1A and roughly $500,000 per year phased in for the new police station and training facility), and a new Washington Supreme Court order on indigent defense that staff said will require phased implementation over a 10‑year period and could roughly triple current costs for indigent defense over time.

Council direction and next steps were procedural: staff will continue budget modeling, bring possible fee and revenue proposals in August–September, and return with more detailed 30% design and cost estimates where applicable for capital projects. No formal budget decisions were taken at the meeting.

For residents, staff urged attention to tax and labor assumptions and flagged that revenue growth tied to development and retail has moderated; Wu noted plan‑check fees and specialty construction trades were down versus the pandemic era, which affects the city’s longer‑term revenue trajectory.

The city will present further budget detail as the 2026 process advances and as staff refine contingency and spending scenarios.