Duluth officials warn of $7.3 million 2026 general fund gap; personnel costs drive pressures

City finance staff and the mayor told the Duluth City Council that the city’s general fund faces a projected $7,300,000 deficit in 2026 and that personnel costs — wages, benefits and contract increases — are the primary drivers of the shortfall.

The preview presentation said revenue growth is expected to be modest between 2026 and 2027, and that balancing next year solely through a property tax levy would still leave the city facing a roughly 10.48% levy increase in 2027. The administration said it will present a formal maximum-levy proposal on Sept. 4 and return in December to adopt the final budget.

The council was shown two extremes: reduce services to close a $7.3 million gap, or raise the levy to avoid reductions. Finance staff warned neither option is sustainable and said the mayor’s September presentation will include both new revenue assumptions and significant expense reductions.

“There's a projected $7,300,000 budget deficit in the General Fund in 2026,” staff presenter Josh said during the presentation. He and other staff emphasized that personnel and benefits make up the large majority of general fund spending and that the city employs roughly 900 people citywide, with most covered by union contracts that have driven recent wage and step changes.

Staff outlined parameters guiding the administration’s approach: seek an affordable and sustainable levy increase; consider capturing new property-tax growth (to spread levy impacts); consider an inflation index when setting a levy (an example used in the presentation was roughly 4%); and seek no net increase in full‑time equivalent positions for 2026. Department directors were instructed to focus on core city services, identify activities the city can stop doing, explore partnerships with other governments and nonprofits, and propose bold or creative ideas to reduce cost or increase efficiency.

Finance staff noted that about 72% of ongoing general‑fund revenue comes from three sources: local government aid, property taxes and city sales taxes. They said local government aid was set flat by the state this year, leaving property taxes as the primary lever the city can control. Staff also pointed to capital needs: they reported what was described as a backlog of street and facility projects — presented as about $573,000,000 for streets, $90,000,000 for buildings and $54,000,000 for rolling stock.

The presentation reiterated that the city receives roughly 27% of a homeowner’s total tax bill (with the county and school district getting larger shares), so the city’s levy choices interact with larger tax‑bill dynamics. The administration also emphasized that one‑time fixes in 2026 would not eliminate a trailing 2027 deficit: the presentation projected a remaining structural shortfall into 2027 under several scenarios.

Mayor Reinhardt thanked department directors for looking for efficiencies and asked the council and public to weigh the tradeoffs ahead of the formal levy and budget material in September.

Ending: The administration scheduled further department‑level briefings with councilors in September and said the mayor will present a detailed levy recommendation Sept. 4 and a final budget for adoption in December.