San Marcos staff warn FY26 outlook requires cuts or higher tax rate; council asks for scenarios

San Marcos City Manager Stephanie Reyes and Finance Director John Locke told the City Council on May 20 that the city’s preliminary fiscal year 2026 general fund budget will be structurally unbalanced at the current tax rate unless the council approves either spending cuts or a higher rate.

Reyes said the city is facing “declining sales tax” and that property tax growth has slowed, and that those trends – combined with inflation – mean the city cannot maintain current programs and services without action. Finance Director John Locke told council the fiscal 2026 property tax revenue at the current rate is “estimated to decrease by $1,300,000,” and that sales-tax receipts have trailed prior years for more than a year.

Why it matters: sales and property taxes make up roughly two-thirds of general fund revenue. Staff presented four example paths: keep the current rate and make roughly $1.1 million in additional cuts; keep the current rate but make deeper cuts (about $2.6 million) to produce a structurally balanced budget; raise the rate to an estimated 63.41¢ to reach structural balance without cuts; or raise to the estimated no-new-revenue rate of 64.47¢, which would add about $900,000 in capacity. Staff said the voter-approval rate would be substantially higher and would trigger an automatic election.

Locke and Reyes described steps staff have already taken to narrow an initial $12 million gap: closing two tax increment reinvestment zones and transferring excess TRZ funds to the general fund, pausing a public-safety staffing plan ($1.4 million saved), $711,000 in department cuts (including a $100,000 collective operating cut), managed-hiring savings target of $950,000, and use of about $990,000 in one-time capital interest to cover some ongoing operating costs. Even after those measures, staff reported a remaining shortfall by pushing some costs into FY27.

Council members pressed for specifics and prioritized public-facing programs. Several council members asked for a concise list showing what departments cut, line-item dollar impacts, and the cost of council’s previously stated strategic priorities (for example: an office of community support and resources, tenant assistance resources, and HSAB funding increases). Reyes said staff will return those detailed reinstate/reinstatement and supplemental-request lists and that if council provides a tax-rate direction staff will prioritize the council’s strategic priorities first.

Questions from council and staff responses included: - On new development: staff said taxable value added in FY26 is much lower than the recent 3–5 year averages, and major projects (IKEA, Buc-ee’s, H‑E‑B) are assessed on Jan. 1 of the year following opening, so revenue impact is delayed. - On peer-city comparisons: staff said peers were chosen for shared characteristics (university presence, municipal electric utility, regional proximity) and acknowledged the value of documenting the selection criteria. - On department cuts: staff explained the $100,000 operating cut was divided proportionally across general-fund departments based on three-year averages of unspent budgets; departments could submit reinstatement requests for priority items.

Council direction: after discussion, several council members signaled they favored moving forward with staff scenarios between the structurally balanced rate (63.41¢) and the no-new-revenue rate (64.47¢) so staff could return to the June budget workshop with focused options. Several members requested the detailed line-item list of cuts and the exact cost of the council-requested priorities before making a final decision.

Next steps: staff will present draft budgets at an August workshop, receive the certified tax roll in July, and return to council in June with targeted scenarios and supporting detail for council to use while setting the FY26 tax rate and budget this fall.