Iowa City staff outline FY26 budget as property tax backfills fade; 1% utility fee proposed to sustain fare-free transit

City Manager Jeff (City Manager) and finance staff on Jan. 13 presented a fiscal year 2026 budget that holds the city

tax rate flat but projects a roughly $2.6 million general-fund gap, warns of the scheduled phaseout of state backfill payments and proposes a 1% increase to the utility franchise fee to help pay for continued fare-free transit.

The presentation laid out key dates for the budget process: February 4 as the latest practical date to finalize the capital improvement program (CIP) and to focus on any change to the maximum tax rate, March 11 as the date by which expenditure decisions should be finalized, and April 15 as the planned adoption date so the city can file the budget with the county auditor.

Why it matters: state property-tax reforms passed since 2013 and additional changes in 2023 have reduced taxable valuation and shifted revenue responsibilities to local governments, staff said. Those changes, combined with insurance premium spikes and slow taxable growth from building permits, leave the city with tighter discretionary dollars for services such as parks, libraries and public safety.

Jeff said the city has seen four straight years in which taxable valuation has fallen short of expenditure growth and projects the 2026 budget will be a fifth. He summarized two major state-driven impacts: the 2013 reduction in commercial/industrial taxability (to 90%) and the 2022/2023 actions that converted certain credits to exemptions and created new homestead exemptions; both moves reduce local receipts and the state backfill for those changes is being scaled down. Jeff said the city received about $1.5 million annually in backfill previously but expects only about $308,000 in FY26 and no backfill in the following year.

Chris O'Brien, who led the revenue portion of the presentation, said property taxes still supply roughly two-thirds of general-fund revenue and about one-third of total city revenues across all funds. "That 66% that comes from property tax makes it difficult as things constrict for us to continually fund our services moving forward," Chris said.

Staff highlighted the residential rollback rate as a key driver. The rollback fell to 46.3%…