Budget director outlines $1.41 billion FY26 plan as revenues slow, pension and internal service costs rise

Budget Director Paul Payne on Wednesday presented the Board of Aldermen Budget Committee with a proposed Fiscal Year 2026 annual operating plan totaling about $1,410,000,000 and told members that slower revenue growth and large tax refunds in the current year required a cautious approach.

Payne said the general fund portion of the budget is $607,400,000 and that the package balances one-time items and ongoing pressures: “This increase is not because of underlying growth. What you’re seeing here is that this year we took a big hit…there was significant refunds and activity that we had this year,” he said, referring to earnings and payroll-tax refunds that materially reduced receipts in the current fiscal year.

The nut graf: the FY26 proposal incorporates one-time ARPA interest transfers, a smaller capital program than last year, creation of an internal service fund to capture police-related support costs, and modest underlying revenue growth assumptions as the committee and public weigh adjustments and potential amendments.

Payne walked the committee through revenues and expenditures in detail. He said earnings-tax receipts are estimated at about $232,300,000 in FY26 after unusually large refunds this year, and he used a conservative underlying-growth assumption of roughly 1.5 percent. Sales-tax receipts, he warned, have softened — down in the first three quarters — and the budget uses modest growth assumptions for sales and use taxes. He told the committee the use tax fund was revised downward because receipts were down about 7.3 percent year‑to‑date.

On the expenditure side, Payne called attention to pension and personnel lines. Pension costs across the city’s retirement systems are projected to rise net about $1,800,000 in FY26; the presentation showed differing movement among systems, with police pension request figures down but other plans rising. Personnel totals show an overall decline in positions in the general fund (down about 184 positions) coupled with an increase in special-fund and enterprise positions, reflecting both reallocations and vacancies.

A significant structural change in the FY26 package is the creation of an internal service fund to better account for services that support the police department but are now provided by other city departments. “We moved the costs associated…into the internal service fund,” Payne said, explaining a $16,400,000 allocation that will appear in the police department budget as a charge for services previously budgeted elsewhere (personnel, facilities, equipment services and the law department).

Payne also described ARPA interest earnings: ARPA funds earned about $37,500,000 in interest through March; after prior appropriations, roughly $22,200,000 remained available. The proposed budget uses $5,000,000 of that interest to support general revenues in FY26, $6,900,000 for circuit court capital projects, and $10,300,000 to a judgments/settlements account requested by the City Counselor’s office.

Capital spending is smaller than last year — roughly $61,400,000 in the capital fund — because the prior-year operating surplus available to transfer to capital is lower than in FY25. Payne also highlighted a planned replenishment of the city’s road salt supply ($800,000) after heavy usage in the previous winter and described internal adjustments that move some personnel costs out of the general‑government category and into internal service or special funds.

Committee members pressed Payne on several revenue items and program specifics during the presentation, including: the short‑term rental tax (Prop S) revenue timing; how the internal service fund mechanism works and why it was created; trends in gaming and sales tax receipts; and the magnitude and persistence of the earnings‑ and payroll‑tax refund impacts. Payne said recurring refunds in future years are uncertain but estimated a conservative ongoing refund exposure of about $14,000,000 (approximately $12,000,000 earnings tax and $2,000,000 payroll tax) until trends are clearer.

Payne also walked members through personnel and salary‑savings assumptions. He said roughly $35,000,000 of salary savings is built into the budget (about $30,000,000 in the general fund), reflecting vacancies and other position changes; the committee discussed vacancy rates, recruiting challenges, and tradeoffs between filling positions and using contractual services.

The committee did not adopt amendments at this meeting. After Payne’s presentation and public comment, the committee recessed to continue a hearing schedule that will include additional departmental presentations (mayor’s office, public safety, comptroller, fire and police, among others) before the committee considers any changes to the ENA-submitted budget.

Ending: The FY26 draft budget presented to the committee balances slower revenue growth assumptions with limited one‑time supports. The committee scheduled follow-up departmental hearings and public testimony before finalizing recommendations to the full board of aldermen, and members signaled attention to pensions, vacancy management, the new internal service charge for police support costs, and the durability of sales‑ and use‑tax receipts.