Des Moines finance staff and consultants warn revenues won’t keep pace with rising costs; square-footage tax collections lag

Des Moines finance officials reported mixed second-quarter results and warned the council that long-term structural shortfalls are likely unless the city adopts new revenue measures or cuts spending.

Finance Director Jeff Friend told the City Council the new square-footage business-and-occupation (B&O) tax, adopted by the council in December and administered through the FileLocal portal, produced about $30,000 in first-quarter collections when the new form was not yet available and about $73,000 in second-quarter collections after the form update. The city’s 2025 budget assumed roughly $840,000 in square-footage tax revenue for the year; collections so far are well below that figure, Friend said. He also reported that delinquent B&O filers are being pursued and that the city is considering an audit vendor to increase collections.

Friend said general fund revenues were about 4% under budget through the first six months of 2025, leaving an ending operating cash balance of roughly $2.1 million, or 8.2% of annual operating expenses, compared with the city policy minimum of about 16.7%. That equates to roughly one month of operating reserves rather than the two months the city targets, and the state auditor has issued an “exit comment” raising concern about the city’s financial condition, Friend said.

“Letters went out to businesses in three groups — those who filed sales without square footage, those who filed square footage without sales, and those who didn’t file — and we’ve been following up,” Friend said. He told council members the finance team can audit taxpayer records under city code and that hiring a third-party audit firm is an option, though firms often work on commission.

Outside consultants from FCS Group presented a six-year baseline general fund forecast that assumed modest revenue growth (roughly 1.5% overall, with property taxes limited by statute) and higher expense growth driven by labor and benefits (roughly 4% assumed annual expense growth). Using conservative assumptions, the baseline showed the city moving toward a structural gap and projected that the general fund could go negative later in the decade unless the council takes action.

FCS recommended the council consider a range of options to close gaps, including a property tax levy/levy-lid lift (requires voter approval), a transportation benefit district (up to $50 vehicle license fee), adjustments to utility taxes within legal limits, and review of business license / B&O rates (some changes can be made by council without a vote, per the consultants). The firm also said impact fees and other one-time capital funding tools can blunt short-term budget pressure but do not replace sustainable operating revenue.

FCS then demonstrated a development-fiscal model intended for staff use. The model compares typical development types — mixed-use, surface‑parked multifamily, highway-oriented commercial, and single‑family — on 10‑year fiscal impacts. Using sample parcels, consultants found that commercial and some mixed‑use redevelopment tends to produce net positive ongoing fiscal results, while lower-density multifamily and single‑family residential developments often result in net operating costs to the general fund. For example, a half‑acre “Pit” parcel modeled as mixed-use produced a modest net positive on a 10‑year basis (roughly $17,000) but generated large one‑time revenues from construction sales tax and transportation impact fees (roughly $179,000 and $280,000 in the consultant’s example). A five‑acre Pacific Highway parcel modeled for highway commercial use produced substantially larger net positive fiscal returns and sizable one‑time revenues in the firm’s scenarios.

Council members pressed on collection strategy for the square‑footage tax, the likelihood of recovering budgeted revenue, and whether increased audit effort or a vendor would be cost‑effective. Deputy Mayor Steinmetz and other members asked for a menu of revenue options at the council’s Sept. 25 meeting; staff and consultants said they will return with concrete revenue and policy options for council consideration.

Absent specific council action, the consultants said the city should plan the 2026 budget conservatively, given current collection shortfalls and low reserves.

Ending: Staff plans follow-up presentations: a menu of revenue options scheduled for the council’s Sept. 25 meeting and a detailed budget-amendment discussion during the fall, and the development model will be shared with staff as a tool to test parcel-specific scenarios.