Council Approves Direction to Proceed on FY26 Budget Forecast and Health‑benefit Plan Changes; Manager Seeks Employee Enrollment Guidance

The Tucson mayor and council voted March 4 to proceed with the city manager’s recommended changes to employee health benefits for fiscal year 2026 and accepted staff’s five‑year financial forecast as the basis for further budget work. The motion to proceed — made and seconded during the study session — passed by voice vote.

City staff presented a multi‑year financial forecast that reduced the projected FY26 operating deficit to approximately $13,000,000 from earlier higher estimates. The forecast assumes base FY25 operating levels plus a potential $17,000,000 pool for contractual commitments and supplemental director requests. The forecast does not assume an economic downturn or shifts in federal funding and notes that unrestricted general fund reserves are projected to decline (an end‑of‑FY26 unrestricted balance was shown as approximately $7.5 million in the presentation).

The council considered the city manager’s recommendation on health insurance plan designs and employer contributions. Staff described a three‑part approach to reduce the gap between available funds (about $4.8 million budgeted for benefits) and estimated health plan cost increases ($7 million–$10 million): 1) increased city contributions totaling about $4.83 million across plans for FY26 as modeled in the forecast; 2) increased employee premium contributions (percentages differ by plan and enrollment tier); and 3) plan design changes that shift some costs to plan users (higher deductibles, added coinsurance in parts of the network and HRA plans, and creation of a fourth specialty prescription tier across plans).

Key elements of the recommendation and council discussion:

- Health plans: Network and HRA plans would see higher deductibles and new coinsurance for some services; a Tier 4 (specialty) retail prescription tier would be added across plans. The HSA plan would keep current plan design and premiums and would retain enhanced city HSA contributions.

- HSA employer incentive: The city manager recommended continuing enhanced HSA employer contributions ($1,500 individual / $3,000 family) for FY26, funded from plan savings, at an estimated added cost of about $1.3 million; staff will review sustainability each year.

- Employer/employee share: An estimated 1% of total plan cost for the network and HRA plans would shift from employer to employee, saving roughly $450,000 annually.

- HRA plan future: The benefits committee was directed in the presentation to study the feasibility of closing the HRA plan as early as the FY27 plan year because enrollment has declined (about 10% of members) and cost increases in that plan have been large. Staff will add education on reimbursement account balances to open enrollment materials so members can plan before any closure.

- Dental plan: Staff recommended moving the dental PPO to self‑funding for FY26, producing an estimated $247,000 in savings without plan changes; retiree DHMO rates would increase by 4% passed through to retirees who elect that plan.

- Employee wellness benefit: The manager proposed allowing employees and their families free access to city recreation facilities for FY26; governance and details would be developed and utilization tracked for cost impact.

Open enrollment will start May 1, 2025, and staff said they will hold in‑person and virtual education sessions throughout May (nine virtual and multiple in‑person meetings plus 1:1 enrollment assistance). Staff also presented exhibits showing paycheck impacts for typical income bands and comparisons of staying in the network plan versus switching to the HSA plan.

Council members pressed staff on prescription drug cost drivers (staff and consultants cited specialty drug spending and utilization), strategies for employee education on affordable dispensing options (staff noted Costco pharmacy is in‑network), and clear outreach to employees who would be affected if the HRA plan is closed. Several council members emphasized strong employee engagement, careful implementation for those impacted, and rounding numbers to simplify employee communications.

After discussion the council approved a motion to proceed with the city manager’s recommendations on health benefits, enabling staff to finalize open enrollment materials, proceed with education sessions, and incorporate the changes into the budget development process. Formal adoption of plan design changes and premiums will occur as part of the FY26 recommended budget and subsequent budget adoption steps.

Sources: city presentation, March 4 study session transcript; staff exhibits on plan design and employee paycheck impacts.