Lacey staff report quieter revenues, rising labor costs; model shows roughly $4.7 million 2026 shortfall under current assumptions

At a June 10 Lacey City Council work session, staff presented the city’s first-quarter 2025 financial report and a five‑year budget model that projects a roughly $4.7 million shortfall for 2026 under current assumptions.

Troy, a city finance staff member, told the council, “You do have in your full packet the detailed first quarter financial report for 2025. I do want to recognize it's about 2 months past due… there were no surprises, so we didn't feel an immediate need to come before council.” He and other staff reviewed revenues, expenditures and the assumptions behind the model the city will use for next year’s budget development.

Why it matters: tax receipts make up about 68% of the city’s general fund operating revenues, and labor costs historically account for roughly two‑thirds of operating expenditures. Small changes in collections or compensation therefore have outsized effects on the city’s budget outlook.

Key figures and trends

- Revenues and cash impacts. Comparing first quarters of 2024 and 2025, general fund revenues were about $587,000 lower year over year. Plan‑check and related service charges were down (Troy cited roughly $151,000 less in service charges and about $239,000 lower plan‑check fees). Investment valuation adjustments reduced reported revenue by just under $400,000 (a non‑cash, year‑end market valuation change). Interest revenues were about $128,000 lower through the first quarter.

- Sales tax. Staff reported first‑five‑month collections of just over $6.4 million and said sales tax receipts were about $272,000 below the same period in 2024. The presentation noted 12 consecutive months of sales‑tax declines and that the current trajectory could require further council discussion if it continues another month.

- Utilities. Water operating revenues were up about $547,000, wastewater about $354,000 and stormwater roughly $68,000, consistent with recent rate increases. On the expenditure side, water operations showed about an $800,000 increase tied to a backlog of meter purchases that recently arrived.

- Labor costs. General fund labor costs were about $1.1 million higher through the first five months of 2025 compared with 2024. Staff said one major labor group remained unsettled for 2025 and that, after retroactive payments for a likely settlement, labor costs could be as much as $3.5 million higher for 2025 than 2024.

- Other taxes. Utility tax collections were reported about $400,000 higher through the first five months (staff attributed most of that to electricity and natural gas increases), while B&O receipts were following the same softening trajectory described for other revenue categories.

Budget model assumptions and 2026 outlook

Staff summarized the major assumptions used in the five‑year projection underpinning 2026 budget planning: no sales‑tax rate increase in 2026 (then 2% per year for 2027–2030); $150 million of new construction added to the tax base in 2026 and $75 million per year thereafter for property‑tax forecasting; 3% annual growth for utility tax and other non‑property taxes; and a 4% annual salary increase assumption (staff noted a 10‑year salary growth average near 7.2%). The model also assumes 100% of council‑authorized budgets will be spent each year.

Troy summarized the combined effect of the modeled tax changes: “Altogether, the increase from these tax sources only is about $4,200,000 of growth in that 5 year period that we're going to look at.” Using those assumptions, staff said next year’s base forecast shows an approximate $4.7 million deficit for 2026 if no policy or revenue changes are made.

Council questions and clarifications

Council members asked clarifying questions throughout the presentation. One council member asked whether the apparent decline in specialty trade contractor receipts was tied to single‑family versus multifamily activity; staff replied the category includes subcontractors and home improvement work and that pandemic home‑improvement spikes make year‑over‑year comparisons uneven. Another council member, identified in the meeting as Leilani, was told the city maintains market‑survey data showing Lacey's pay is competitive with comparable jurisdictions.

Staff also explained a recent capital transfer (money moved into capital funds for the police station) reduced the principal invested in the general fund and therefore lowered interest earnings; they emphasized the investment valuation adjustments are a year‑end accounting effect and a realized loss would occur only if the city sold investments before maturity.

Related costs and obligations

Staff noted voter‑approved, countywide public‑safety sales tax receipts added about $592,000 in the public safety fund (that increase is dedicated to public safety expenditures). The city’s parks comprehensive‑plan assumption for maintenance of the next phase of Rainier Vistas was cited at about $350,000 per year for that phase. Staff observed that new facilities create ongoing maintenance obligations that must be budgeted.

Process and next steps

Rick, a city staff member, said the presentation was intended to inform council as staff begins 2026 budget development and to answer council questions; he recalled prior discussion of these projections at the council’s January retreat. Staff did not propose specific policy changes during the work session; instead they presented the model, assumptions and areas staff will review as they prepare budget options for council consideration.

Procedural note

The council amended and approved the meeting agenda at the start of the session to move the financial report to the first item; the motion to approve the agenda as amended was moved, seconded and carried by voice vote.

The council received the financial presentation and asked staff to continue budget development work under the assumptions discussed; staff will return with budget proposals and options in the coming months.