San Marcos Council weighs tax-rate choices as FY2026 budget projects $366.4 million

SAN MARCOS, Texas — City staff on Tuesday presented the proposed fiscal year 2026 budget for San Marcos and urged the City Council to choose a tax-rate path that officials said will affect services and staffing in the coming years.

City Manager (interim) Elizabeth Reyes and Finance Director John Locke outlined a $366,400,000 all-funds proposal that includes $122,800,000 for the general fund and several policy priorities, including a $750,000 allocation for the Human Services Advisory Board, a new Office of Community Support and Resource Navigation, and $70,000 for tenants’ rights efforts.

Reyes said the plan “represents months of collaboration” and called the budget “a road map that turns your values and priorities into action for San Marcos.” She told the council that rising costs, slower sales-tax growth and state-imposed limits on property-tax increases mean council choices this year will affect whether services are sustained or cut.

City staff presented three tax-rate scenarios: the “no new revenue” rate of 62.78 cents per $100 of assessed value; a “long-term focus” rate of 64.96 cents per $100 (staff-recommended baseline); and the voter-approval rate of 70.47 cents per $100, which would trigger an automatic election if exceeded. Under the no-new-revenue rate staff said the general fund is balanced for FY2026 but faces a projected $5.6 million shortfall in FY2027. The long-term focus rate would generate about $1.9 million in additional FY2026 revenue and reduce the FY2027 shortfall; the voter-approval rate would generate larger capacity in the short term.

Locke walked the council through multi-year forecasts showing that without additional revenue the city will likely face larger shortfalls in later years. He warned some state bills under consideration could further limit local revenue growth, and noted certain special-session proposals would force cuts of an estimated $34 million to $54 million from the FY2026 plan unless voters approve new funding.

Council members spent more than an hour questioning staff about assumptions and trade-offs, including a longer-term need to staff fire Engine 7, which staff said will require roughly $2.2 million annually once fully staffed. Staff described a plan to phase-in a $1,000,000 shift (about $250,000 per year over four years) to move a larger share of citywide software costs onto the general fund rather than utility funds.

Reyes and Locke also highlighted expiring federal and ARPA-funded positions and programs that will need new local funding or termination: staff estimated about $340,000 in ongoing costs that must be absorbed in FY2027 and another $119,000 in FY2028. Examples cited by staff included eviction-prevention services ($70,000), diversion beds (Evoke Wellness, $50,000), maintenance for the public-safety software (“New World,” $80,000), an intrusion-prevention system ($35,000), a mental-health clinician collaboration ($70,000), and upgrades to the emergency operations center (roughly $9,000 annually). Staff warned the city’s FY2027 budget will need to account for those items or reduce services.

The workshop also included proposed utility rate changes that staff said are needed to meet legal debt-service coverage and replace aging infrastructure: the electric utility advisory board recommended a 4.4% effective electric rate adjustment (staff said that keeps San Marcos’ typical residential electric bill lowest among peer cities and helps restore debt-coverage ratios); water/wastewater staff recommended a 10.4% effective increase (combining a 10.8% water increase and a 9.4% wastewater increase) to cover rising contract and debt costs, and resource-recovery proposed a 1% increase to stabilize refuse operations. Staff estimated the combined effect of the utility adjustments at roughly $16 more per month for an average single-family residential customer (about a 6% increase across all utility funds).

Council discussion produced no final tax-rate vote. Instead, after debate the council gave staff direction to use the 64.96-cent-per-$100 “long-term focus” rate as the baseline for the FY2026 budget and to return with impact analyses for higher rates — including examples around 67 and 68 cents per $100 — so members could compare taxpayer impacts and finalize a maximum proposed tax rate at the September hearings. Mayor Mary Houston said the city must balance near-term operations with long-term sustainability; council members were split on how far to raise the rate now.

The presentation also covered benchmarking data staff used to compare San Marcos with peers: the city’s current property- and sales-tax receipts are below peer averages; about 37% of San Marcos acreage is tax-exempt (including university and county properties) and another portion lies in floodplain, leaving roughly 47% of the city’s land either tax-exempt or reduced in value because of floodplain designation, staff said. Those factors, staff said, contribute to San Marcos’ higher-than-average tax rate among peers.

On other policy items staff noted: pending state action changing the voter-approval multiplier (Senate Bill 9 in special session, which would lower the multiplier from 3.5% to 2.5%) and a House-passed change raising the business personal property exemption from $2,500 to $125,000 (effective FY2027) — both of which staff said would reduce local revenue capacity and complicate long-term planning. Staff also flagged two recently enacted/considered bills affecting firefighters: House Bill 4144 (as described to council) would require a critical-illness supplemental benefit for qualifying firefighters, and House Bill 198 would require occupational cancer screenings be offered to firefighters; staff said they are working with benefits consultants to quantify costs.

City staff provided a timeline: the council will set a maximum proposed tax rate at its Sept. 2 meeting (the ceiling the council may later lower but not exceed), hold a second public hearing Sept. 16, and adopt the budget and tax rate on Sept. 16 if desired. Staff will return before those dates with the requested impact breakdowns, revenue assumptions and the utility-rate public-hearing materials.

Why it matters: staff described FY2026 as a pivotal year. Council choices on the tax rate this fall will affect whether the city can absorb expiring grants and ARPA-funded positions, fund long-term staffing for a needed fire apparatus, and maintain service levels while protecting reserves — all while several state bills could further restrict the city’s revenue flexibility.

What’s next: staff said public hearings on the budget and utility-rate proposals are scheduled Sept. 2 and Sept. 16, and that the Neighborhood Commission will review the proposal Aug. 20. Council will set the maximum proposed tax rate at the Sept. 2 meeting and is scheduled to adopt the budget Sept. 16.

(Reporting in this article is based on the Aug. 19 San Marcos City Council work session and staff presentations.)