Lakeway budget gap forces council to weigh tax hike, spending cuts or delayed projects

Lakeway City Council on Monday reviewed a draft fiscal 2025–26 operating and capital budget that shows slower property-value growth and uncertain permit revenue, leaving a potential shortfall unless the council raises the tax rate or cuts projects.

City Manager Joseph and Finance Director Rick summarized the $20.8 million operating budget and stressed that the city’s growth-driven revenue has slowed. Rick said the appraisal district’s numbers reduced the city’s “base value” compared with last year and that staff used a conservative methodology for projecting building-permit and site-development revenue.

Why it matters: Lakeway has historically relied on new-development revenue to keep its tax rate low while funding street, park and facility projects. With the recent slowdown, the council must choose whether to increase the property tax rate to preserve capital spending or scale back planned projects and carry a smaller fund balance.

What staff told council

- Finance director Rick presented the year-to-date finances and FEMA reimbursements for winter storm costs, saying the city received $1.38 million from FEMA but that, without that one-time amount, revenues would show a negative variance. He said the city’s projected ending fund balance depends heavily on how FEMA funds are treated in the final budget.

- Rick and City Manager Joseph showed staff calculations of the city’s “no-new-revenue” and voter-approval tax rates under Texas truth-in-taxation rules and reviewed several rate scenarios. Under the no-new-revenue calculation shown, a typical Lakeway homeowner would pay roughly $13.63 at that rate; staff also displayed figures for the “voter-approved” maximum rate.

- For building-permit revenue staff compiled a project-by-project list of active and anticipated developments and applied a conservative confidence factor to project fee receipts. Staff said that while some large projects remain on the horizon, timing is uncertain and several high-dollar items likely will not generate their full estimated revenue in FY26.

Council discussion and options

Council members pressed staff for clarity on which developments drive revenues and for more direct outreach to major developers. Several members warned that adopting too-small a tax rate would force the city to defer capital projects or run a deficit. Councilman Ford said the choice was stark: “If you don’t charge the taxes necessary for the revenue you expect, you’ve given up the capital improvement program.”

City manager Joseph framed the options as three broad choices: (1) raise the tax rate and maintain project funding; (2) run a one-year deficit and allow the capital reserve to fall; or (3) trim or delay capital projects and new initiatives. Multiple council members said they prefer to avoid “kicking the can down the road,” while others urged caution and flagged the risk that expected permit revenue may arrive in a later fiscal year instead of FY26.

Next steps

By unanimous vote the council set a second public hearing on the proposed FY2025–26 budget and a separate public hearing on the proposed tax rate for 6:30 p.m. on Sept. 22 at Lakeway City Hall. Staff said a revised spreadsheet reflecting the evening’s decisions would be circulated to council members so they could continue to test rate, revenue and spending assumptions before the Sept. 22 hearings.

Ending

The council did not adopt a final tax rate Monday; instead it agreed to continue deliberations and to consider developer feedback and any further staff adjustments before voting on the budget and tax rate at the Sept. 22 hearing.