Lacey city manager presents $224.6 million 2026 budget; recommends using about $3 million in reserves

City Manager Rick Watt presented the City of Lacey—s proposed 2026 budget to the Lacey City Council on Tuesday, Oct. 21, proposing a $224,608,571 spending plan that he said is "balanced, but ... balanced with, using about 3 just over $3,000,000 in reserves." The presentation kicked off the formal review process that includes public hearings and final council action scheduled for Dec. 16.

The proposed budget focuses on maintaining current service levels while funding capital and strategic commitments. Watt told the council the plan supports about 342.5 full-time equivalent positions and a general fund of $74,344,285, and he highlighted a number of pressures and one-time costs driving the recommendation.

Why it matters: the budget determines funding for police, streets, parks and utilities and would change household utility bills. Watt warned that weakening sales-tax growth and rising operating costs leave the city with limited options and require a mix of revenue enhancements, economic-development investments and expenditure reductions to avoid continuing to draw on reserves.

Key figures and revenue context

- Total proposed budget: about $224.6 million; Watt said the proposal is balanced using just over $3 million from reserves. - General fund: $74,344,285 (decrease from 2025 driven mainly by capital transfers and one-time projects in the prior year). - City population and staffing: the city serves about 60,380 residents and the budget supports roughly 342.5 FTEs (about 276 FTEs funded by the general fund). - Sales tax: the city—s largest but most volatile revenue source; projected 2026 budgeted sales-tax receipts are about $19.29 million. Watt said month-over-month sales-tax receipts have flattened compared with earlier years.

Watt summarized wider economic and policy influences: a flattening of development activity that limits assessed-value growth, inflationary increases in labor and materials, the failure of a recent metropolitan parks district ballot measure and state and federal mandates that can shift costs to local governments.

Proposed rate and fee changes for utilities

Watt reviewed multiyear rate studies adopted earlier and the specific 2026 adjustments that fund capital programs and operations for Lacey—s three utilities:

- Water: a 5.25 percent increase yielding an average residential monthly charge of about $42.80. - Wastewater (city conveyance portion): a 9.5 percent increase, about $36.27 monthly for the Lacey conveyance portion; Watt said a combined bill that includes treatment charges from the regional treatment partner would be about $85.22 per month on an ERU basis. - Stormwater: a 4.5 percent increase, to about $15.46 per month.

Capital priorities and projects

Watt identified capital work and one-time maintenance included in the recommended budget:

- Lacey police station: about $3.2 million of remaining project expenditures programmed for 2026 toward a roughly $61.5 million project; staff said move-in and commissioning depend on delivery and commissioning of a generator and could occur early in 2026. - Regional Athletic Complex (RAC) field enhancements: design work and 30 percent design milestones scheduled; staff described options including conversion of Field 2 to turf and lighting. - Transportation Benefit District (TBD) overlay: about $5.3 million in pavement work in 2026; additional TBD funding proposed for sidewalks and pedestrian safety. - Sidewalks and sidewalk-marking program: Watt cited a sidewalk inventory and added $500,000 (TBD) plus about $411,000 in general-fund sidewalk repair funding; the city will mark sidewalks with separations of 3/4 inch or greater and prioritize replacements by severity. - Annexation strategy and implementation placeholder: roughly $403,000 recommended for next-step analysis, outreach and economic analysis if the council pursues annexation discussions with Thurston County. Watt said the amount covers more than a study and includes early implementation and outreach costs. - Facility maintenance: an estimated $25,000 to replace a rotting beam at the community center and modernization of one City Hall elevator in 2026 (Watt said elevator modernization costs are roughly $250,000 each and the city proposes deferring one modernizing project pending future facility use decisions).

Program and grant funding

Watt proposed continued funding in line with council priorities: a $300,000 human-services grant program administered by the Human Services Commission; rapid-response cleanup, mobile outreach and regional housing council contributions tied to the regional housing agreement; continued funding for climate-action rebates and implementation; and one-time or pilot allocations such as the makerspace ($200,000) and a $55,000 allocation for the food-truck/night-market program.

Operational costs and staffing

Watt emphasized that personnel costs are the largest expenditure category (salary and benefits are more than two-thirds of general-fund expenditures). The draft budget adds a small number of positions supported by dedicated funds: a capital-projects position in water utilities (billable to the utilities), a journey-level stormwater maintenance technician and a utility-billing position in the utilities division. Watt said he did not include several requested positions because the city lacks identified funding; examples he listed included a public-records specialist, emergency-management support and additional parks and streets maintenance technicians.

Debt and fleet

Watt reviewed the city—s existing debt and noted that final police-station debt service will increase annual payments beginning in 2026. Internal-service funds include vehicle and technology replacement schedules; staff said rising replacement costs have left some vehicle-replacement funds short this year and that the city will revisit replacement cycles and funding assumptions.

Council questions and discussion

Council members pressed staff on the long-term outlook and next steps. Several members emphasized the need to combine revenue options, strategic economic-development investments and expenditure-targeted reductions rather than rely indefinitely on reserves. Watt described a three-pronged approach the city has been pursuing for more than a year: (1) identify potential revenue enhancements available under state law (he listed examples including a gambling tax, technology fees, B&O and franchise fees), (2) pursue a five-year economic development strategy to expand the commercial tax base, and (3) prepare expenditure-reduction options and priority reviews for 2027.

On short-term revenues, Shannon, a city staff member, answered a council question on lodging tax collections: "We are actually currently collecting tax on those short time stays, so there are currently taxes coming in from those sources." That answer followed questions about whether short-term rental platforms (for example, vacation rentals) are being captured in the city—s lodging-tax reporting.

Several council members urged early council deliberation on hard choices, including possible cuts, and requested clearer public-facing materials. Watt said the administration will present additional budget workshops, revenue briefings and hearings and will bring an economic-development strategy to council in December to inform 2026 and 2027 planning.

Public process and next steps

Watt said the formal budget process begins with a revenue briefing Nov. 3, followed by a first budget hearing Nov. 18 and a second hearing Dec. 2; the council is scheduled to take final action on the budget at its Dec. 16 meeting. Watt said the budget document and presentation slides will be posted on the city website for public review and invited public comment during the hearings.

Ending

The presentation framed 2026 as a year for prioritizing core services while continuing targeted investments and advancing a revenue-and-expenditure strategy to reduce reliance on reserves. Council members and staff agreed to additional workshops and hearings before adoption and to continued work on revenue options and an economic-development plan.