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…