Waco officials outline FY 2025–26 budget challenges, pension choices and grant shortfalls

WACO — City staff on June 3 gave the Waco City Council a broad briefing on fiscal year 2025–26 budget development, warning that the general fund relies heavily on property and sales taxes, that tax increment financing (TIF) districts divert growing amounts, and that recent federal grant cancellations will reduce available funding.

The presentation at the Bosque Theatre Gallery was led by Assistant City Manager/Chief Financial Officer Blue Kostelich and Colin Booth, managing director of finance, who walked the council through revenue sources, expense drivers and options the council will face at a budget retreat Friday.

"Property taxes being 43.3% of our FY25 forecast through the end of the year and sales taxes being about 29%," Booth said, summarizing the general fund's concentration in two revenue streams. "When you add those two together, it's 72.2%." The heavy reliance means sales- and property-tax volatility has an outsized effect on the city's ability to fund services, staff said.

Kostelich and Booth also outlined several structural constraints and choices. Tax increment financing (TIF) districts have diverted roughly $31.3 million in property tax revenue to date and, based on current projections for the two main districts (TIF 1 and TIF 4), could divert an estimated $657 million over 25 years. Council members were told that the council retains flexibility — for example by changing contribution rates or setting a maximum annual contribution — but those are policy decisions that would require council action.

Outside-agency contributions were another focus. Staff said discretionary funding to outside organizations had grown in recent years and currently amounts to roughly $1.8 million in the current year, with total general-fund contributions to outside agencies reported near $8.6 million. Kostelich said the administration proposes a five-year phase-down of discretionary outside-agency funding and plans to move Creative Waco funding into hotel-occupancy-tax (HOT) funds.

Personnel costs are the largest general-fund expense, and a major driver of budget pressure. Booth and Kostelich detailed multi-year public-safety compensation investments agreed through collective bargaining and meet-and-confer processes. The city has increased police and fire pay in staged steps to close gaps with peer cities; staff said the three-year investment in fire and police compensation totals roughly $15 million and has raised those departments’ share of compensation spending.

City staff said the police department currently has 15 open sworn positions. "It's a very competitive market," Kostelich said when council members asked about recruiting and retention.

Pension obligations at the Texas Municipal Retirement System (TMRS) were highlighted as a significant and growing cost. Kostelich said Waco's funded ratio dropped from about 90% in 2021 to roughly 84.2% after the city adopted a 30% repeating, non-retroactive cost-of-living adjustment (COLA) change; the employer contribution has increased from roughly 13.7% to about 18.13% and is projected to rise to 18.13% for FY2026. "Our accrued liabilities are about $670 million and our smoothed assets about $564 million," Kostelich said. Staff presented modeled costs for alternative COLA options: a fully retroactive 30% COLA would add an estimated $1.5 million annually; a 70% retroactive COLA would raise the city's required employer contribution toward an estimated $34.3 million annually (an increase of roughly $11 million per year compared with current levels), according to the analysis provided to council.

Utility rates and customer bills were also reviewed. Staff said the average residential customer using roughly 8,000 gallons of water and 5,000 gallons of sewer saw a monthly combined bill that rose from about $112 to $136 over five years; wastewater and solid-waste components have had planned rate increases tied to capital projects such as a new landfill and transfer station.

Federal grant funding — once a major source of temporary additions to city budgets and programs — emerged as a near-term problem. Kostelich reported that the city has $11.2 million in awarded-but-not-signed grants, $6.55 million encumbered, $11.21 million spent year-to-date, and $7.16 million in unreimbursed FY25 expenses; canceled federal grants total about $4.28 million, with most of that in the health department and housing. "We have to ask the questions because that is $44.2 million that our community has to do without," one councilmember said during discussion of pending federal awards and recent cancellations.

Council members asked for clarifications and next steps. Mayor Holmes and several council members thanked staff for the briefing and confirmed they will use Friday's retreat to give staff direction on priorities and tradeoffs. City Manager Bradley Ford said the presentation was intended to set the stage for the retreat and to solicit council feedback on policy options, including TIF contribution policy, how aggressively to reduce outside-agency funding, and how to address pension-COLA choices.

What happens next

Staff will bring a detailed budget proposal and refined options to the council at its annual retreat Friday. The presentation flagged several policy levers that would require council action — including TIF contribution changes, shifts of certain programs to HOT funds, potential adjustments to outside-agency support and decisions about whether to adopt any TMRS COLA changes beyond the city's current 30% repeating, non-retroactive plan.

Speakers

- Bradley Ford, City Manager (government) - Blue Kostelich, Assistant City Manager/CFO (government) - Colin Booth, Managing Director of Finance (government) - Mayor Holmes, Mayor (government) - Josh Borderud, Council Member, District 3 (government) - Darius Ewing, Council Member (government) - Andre Barefield, Mayor Pro Tem (government) - Laura Wagstaff, Assistant Director, Development Services (government)

Authorities

- Texas Local Government Code section 171.004(c) (statute) referenced_by ["waco-budget-fy26-worksession-2025-06-03"] - Texas Municipal Retirement System (TMRS) plan rules (policy) referenced_by ["waco-budget-fy26-worksession-2025-06-03"] - House Bill 9 (business personal property exemption increase) referenced_by ["waco-budget-fy26-worksession-2025-06-03"] - Senate Bill 1173 (procurement threshold increase) referenced_by ["waco-budget-fy26-worksession-2025-06-03"] - Senate Bill 1851 (audit filing / no-new-revenue tax-rate trigger) referenced_by ["waco-budget-fy26-worksession-2025-06-03"]

Actions: []

discussion_decision: {"discussion_points":["General fund revenues are highly concentrated in property and sales taxes (about 72.2% combined).","TIF 1 and TIF 4 are diverting growing property-tax revenue; council can adjust contribution rates or set maximums.","Outside agency contributions have grown; staff proposes a five-year discretionary phase-down and moving Creative Waco funding to HOT funds."],"directions":["Staff to present detailed budget options and scenarios at the council retreat on Friday, June 6, including TMRS COLA cost modeling and TIF contribution alternatives."],"decisions":[]}

clarifying_details:[{"category":"general_fund_revenue_mix","detail":"Property taxes 43.3% and sales taxes 29% of FY25 general fund forecast","value":null,"units":"percent","approximate":false,"source_speaker":"Colin Booth"},{"category":"TIF_diversions","detail":"Cumulative diverted property taxes to TIF funds to date","value":"31,319,000","units":"USD","approximate":false,"source_speaker":"Colin Booth"},{"category":"TIF_projection","detail":"Projected property-tax diversion over 25 years based on current plans","value":"657,000,000","units":"USD","approximate":true,"source_speaker":"Colin Booth"},{"category":"outside_agency_funding","detail":"Discretionary outside-agency funding proposed to be phased down over five years","value":"1,800,000","units":"USD","approximate":true,"source_speaker":"Blue Kostelich"},{"category":"TMRS_funded_ratio","detail":"Smoothed funded ratio after COLA change","value":"84.2","units":"percent","approximate":false,"source_speaker":"Blue Kostelich"},{"category":"TMRS_accrued_liability","detail":"TMRS accrued liabilities and smoothed assets","value":"670,000,000","units":"USD","approximate":false,"source_speaker":"Blue Kostelich"},{"category":"TMRS_assets","detail":"TMRS smoothed assets","value":"564,000,000","units":"USD","approximate":false,"source_speaker":"Blue Kostelich"},{"category":"TMRS_employer_contribution","detail":"Employer contribution projected for FY2026","value":"18.13","units":"percent","approximate":false,"source_speaker":"Blue Kostelich"},{"category":"TMRS_cost_options","detail":"Estimated annual cost of 30% retroactive COLA","value":"1,500,000","units":"USD","approximate":true,"source_speaker":"Blue Kostelich"},{"category":"TMRS_cost_options","detail":"Estimated annual employer contribution and cost for 70% retroactive COLA","value":"34,300,000","units":"USD","approximate":true,"source_speaker":"Blue Kostelich"},{"category":"police_vacancies","detail":"Open sworn peace officer positions in Waco PD","value":15,"units":"positions","approximate":false,"source_speaker":"Bradley Ford"},{"category":"federal_grants_canceled","detail":"Canceled federal grant balance (primarily health and housing)","value":"4,283,951","units":"USD","approximate":false,"source_speaker":"Blue Kostelich"},{"category":"federal_grants_awarded_unsign","detail":"Awarded but unexecuted grants","value":"11,200,000","units":"USD","approximate":false,"source_speaker":"Blue Kostelich"},{"category":"avg_residential_bill","detail":"Average combined customer bill in 2025 (water/wastewater/solid waste)","value":"136.41","units":"USD_per_month","approximate":true,"source_speaker":"Blue Kostelich"}],

proper_names:[{"name":"Waco","type":"location"},{"name":"Texas Municipal Retirement System","type":"agency"},{"name":"TIF 1","type":"other"},{"name":"TIF 4","type":"other"},{"name":"Creative Waco","type":"program"},{"name":"Mission Waco","type":"organization"},{"name":"TMRS","type":"agency"}],

community_relevance:{"geographies":["City of Waco"],"funding_sources":["property tax","sales tax","TIF","HOT","federal grants"],"impact_groups":["taxpayers","city employees","retirees","public safety personnel"]},

meeting_context:{"engagement_level":{"speakers_count":8,"duration_minutes":141,"items_count":1},"implementation_risk":"medium","history":[{"date":"2025-06-03","note":"Budget development briefing ahead of annual council retreat"}]},

searchable_tags:["budget","FY2026","TMRS","pension","TIF","property tax","outside agencies","federal grants"]

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salience:{"overall":0.78,"overall_justification":"City-level budget choices affect core services, personnel costs and long-term liabilities.","impact_scope":"local","impact_scope_justification":"Decisions affect Waco municipal services and tax rates.","attention_level":"high","attention_level_justification":"Budget and pension changes affect operations, employees and taxpayers.","novelty":0.3,"novelty_justification":"Many issues are ongoing but recent federal grant cancellations and TMRS cost projections are timely.","timeliness_urgency":0.8,"timeliness_urgency_justification":"Council must set priorities at an imminent retreat.","legal_significance":0.6,"legal_significance_justification":"Statutory TMRS rules and Local Government Code influence policy options.","budgetary_significance":0.85,"budgetary_significance_justification":"Projections show multi-million-dollar impacts and long-term debt decisions.","public_safety_risk":0.4,"public_safety_risk_justification":"Police and fire staffing/compensation are budget drivers but not immediate safety crises.","environmental_impact":0.1,"environmental_impact_justification":"Limited direct environmental effect.","affected_population_estimate":266000,"affected_population_estimate_justification":"Citywide population (~Waco city residents) may be affected by tax/service changes.","affected_population_confidence":0.3,"affected_population_confidence_justification":"Estimate based on city population; impact intensity varies by group.","budget_total_usd":null,"budget_total_usd_justification":"Specific FY26 budget totals not yet adopted."},

engagement_forecast:{"newsworthiness":{"national":0.05,"regional":0.2,"local":0.85,"justification":"Primarily local governance and budget priorities; limited regional interest."},"notify_recommendation":{"audience":"city","reason":"City budget and pension decisions are pertinent to local residents, employees and stakeholders.","audience_regions":["US-TX-WACO"],"justification":"Decisions will affect city services and taxes."},"notify_thresholds":{"local_min":0.5,"regional_min":0.7,"national_min":0.9},"predicted_interest":{"national":0.05,"regional":0.25,"local":0.8,"justification":"High local engagement expected at retreat and council meetings."},"predicted_click_through":0.35,"predicted_click_through_justification":"Local stakeholders expected to click for details."},

graph_signals:{"jurisdictions":["US-TX"],"jurisdictions_justification":"State-level pension rules and legislative bills discussed.","ontology_topics":["municipal_budget","pensions","tax_policy"],"ontology_topics_justification":"Central to the presentation.","entities":[{"id":"waco-city","name":"Waco","type":"location"},{"id":"tmrs","name":"TMRS","type":"agency"}],"entities_justification":"Referenced agencies and jurisdiction."}

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