San Marcos council directs staff toward higher tax-rate scenario to close FY26 budget gap

San Marcos City Council met June 26 for a budget workshop to review the city’s fiscal outlook and give direction to staff on building a proposed FY 2025–26 budget.

City Manager Reyes told the council, “This budget is a testament to a collaborative effort crafted through council direction, staff expertise, and public input,” and presented staff’s analysis showing that property- and sales-tax revenues are not keeping pace with projected expenses.

The nut of the presentation was stark: with an estimated 3% decline in overall taxable property value, staff said the general fund would require about $3.1 million in reductions to remain structurally balanced at the current tax rate. Finance Director John Locke told the council the proposed budget will be submitted Aug. 19 and that those materials will include the formal “no new revenue” and voter-approval tax-rate calculations after the Hays County certified roll is received July 25.

Council discussion focused on three tax-rate scenarios staff modeled: a “structurally balanced” rate of about 64.03 cents per $100 valuation, an initial “no new revenue” scenario near 64.96 cents, and a revised no-new-revenue option that would cash-fund equipment replacement in FY26 to reduce future debt service. Council members repeatedly stressed the tradeoffs: without a rate increase, staff said, the city would need deep program cuts that would affect personnel-heavy services such as police, fire and parks.

After discussion, a majority of council members voiced support for the higher no-new-revenue estimate. Council Member Rodriguez said, “I am definitely leaning towards the 64 96,” citing ability to fund increases to social-service grants and a proposed Office of Community Support and Resources. Council Member Lorenzo Gonzales and Mayor Hewson also expressed support; Council Members Mendoza and Scott indicated they preferred the lower structurally balanced figure. Council Member Garza said she was reluctant but ultimately supported the 64.96 option in the discussion.

Council approved a set of decision points that staff will carry into the proposed budget packet for Aug. 19: - Continue the city’s compensation philosophy (a cost-of-living/merit approach) and include cost-of-living adjustments for FY26. Council indicated unanimous support to retain the compensation plan and include COLA funding in the proposed budget. - Fund balance uses: staff recommended applying the portion of fund balance in excess of the city’s 25% policy to one-time needs (city-hall setaside, capital outlay and cash funding of equipment replacement). Council expressed support for the proposal in concept but Council Member Rodriguez abstained on final direction to allow additional time to consider alternatives. - Fees: council approved staff’s proposed fee adjustments, including new special-event tiers (tier 1 — single-day large events, tier 2 — multi-day large events), revisions to planning-and-development fees (5% increase), and increasing the sidewalk in-lieu rate (from $10 to $20 per sq. ft.), with staff directed to continue exploring an annual incremental adjustment plus a triennial in-depth review. - Hotel tax: council approved staff’s recommendation to budget hotel-tax revenue at a conservative 5% increase for FY26 (embassy-suite remodel factored in). Staff also proposed a new heritage preservation grant program funded by hotel-tax revenue; staff will return to council with policy guidelines this summer and a call for applications in October. - Resource-recovery (solid-waste/recycling): council approved a 1% rate increase in the resource recovery fund to help smooth future rate pressure.

Staff flagged multiple budget risks and longer-term expenses that will affect FY27 and beyond, including: transition of ARPA-funded positions and programs into the general fund, a possible SAFER grant contingent hire for fire staffing, an annual equipment-replacement program (radios and fire apparatus) and anticipated legislative changes such as House Bill 9 (discussed in the presentation) that expands business personal property exemptions and will reduce local property tax yields in later years.

On workforce issues, staff reiterated that investments in compensation and benefits have reduced citywide turnover (citywide vacancy dropped from about 15% in 2022 to 6% in June) and increased positive survey responses — the percentage of employees who said benefits encouraged them to stay rose from 64% in 2022 to about 80% in 2024. Council directed staff to continue funding the compensation philosophy in the proposed budget and to bring back specifics for upcoming negotiations and TMRS considerations.

On utilities and customer-facing operations, staff told council they are expanding third-party assistance partners for utility-payment help; the city reported 189 pledges for assistance in the fiscal year to date, with 128 occurring in May–June after new agency agreements were implemented. Council asked staff to keep working on operational fixes so customers who make payments are reconnected promptly; staff said a software upgrade and ongoing CUAB review of reconnect and “other fee” policies are underway.

Locke closed the workshop by reminding the council that the proposed budget (and the formal no-new-revenue and voter-approval rate calculations) will be filed Aug. 19 and that council will receive additional neighborhood-commission briefings the week after. The tax-rate adoption and budget approval are scheduled for the Sept. 16 meeting, after public hearings.

Council members and staff emphasized that decisions this year aim to preserve services while building multiyear stability; staff noted that delaying capital-equipment purchases by issuing debt would increase future debt service, and that some one-time uses of fund balance could lower FY27 pressures.

Votes at a glance - Direction on tax-rate scenario: council majority signaled support for the higher “no new revenue” estimate (approximately 64.96¢ per $100). Recorded statements: Council Member Rodriguez (64.96), Council Member Lorenzo Gonzales (64.96), Mayor Hewson (64.96), Council Member Garza (eventually signaled support for 64.96); Council Members Mendoza and Scott preferred the lower structurally balanced estimate (about 64.03). (This was a workshop direction rather than a formal ordinance adoption.) - Compensation philosophy and FY26 COLA funding: council approved direction to include employee compensation funding in the proposed budget. - Fee adjustments: council approved staff’s proposed special-event and planning/permitting fee changes (5% general planning fee increase, new special-event tiers, sidewalk in-lieu increase). - Hotel tax revenue assumption: council approved budgeting a 5% increase to hotel-tax revenue for FY26 and asked staff to return with heritage-grant policy in August/September. - Resource recovery: council approved a 1% increase in resource-recovery rates for FY26.

What happens next Staff will prepare the proposed FY26 budget and file it with council on Aug. 19, then brief the Neighborhood Commission the following day. There are four public hearings scheduled before council’s Sept. 16 adoption vote (two on the tax rate, two on the budget); any proposed fee changes will be subject to public hearings as required. Staff will return with concrete budget materials, the certified roll-based tax-rate calculations after July 25, and the hotel-tax heritage-grant policy for council review this summer.

Ending The council workshop concluded with staff and council agreeing on the schedule for the next budget steps and further review of the cost, policy and operational details that underlie the decisions staff was directed to prepare for the Aug. 19 proposed budget packet.