San Marcos staff outline $1.1 million shortfall, offer tax-rate and cut scenarios to balance FY26 budget

San Marcos city staff presented a preliminary fiscal year 2025–26 general fund forecast Tuesday, telling the City Council that the proposed budget currently shows a $1,100,000 shortfall and outlining options that include program cuts, use of one-time funds and raising the tax rate.

City staff emphasized that property-taxable value declines and falling sales-tax receipts are the primary drivers of the shortfall. “Collections have been down compared to prior year and budget,” staff said, and sales tax is a major revenue source together with property tax, which “make up two thirds of the overall general fund revenue,” Finance Director John Locke said.

That combination of weaker revenues and ongoing inflation has pushed the city to consider both spending reductions and tax-rate adjustments. Staff presented a range of scenarios: keeping the current tax rate of 60.3¢ would leave the city about $1.1 million short and require cuts; keeping the rate but making additional structural reductions would require roughly $2.6 million in cuts; a structurally balanced tax rate was shown as about 63.41¢; and the staff’s estimate of the “no new revenue” tax rate was about 64.47¢, which would provide roughly $900,000 of additional capacity.

Why it matters: staff said the gap is driven by a combination of declining sales-tax receipts, lower new development added to the tax roll and reductions in existing taxable value. John Locke and budget staff showed that FY26 new taxable value added to the roll is lower than the three-year average, and that sales tax collections trailed prior years (a rolling 12-month comparison showed a 2.3% decline at one point). The result, staff said, is a roughly $5.0 million swing in revenue growth the city had relied on in prior years.

Staff described several actions already taken to shrink the gap. They paused a public-safety staffing plan, which staff estimated saved about $1.4 million; reduced other expenses by $1.1 million (including adjustments tied to a conference-center-related account); identified $990,000 of one-time CIP interest funds to be used for ongoing facility maintenance and asphalt work; and set a managed-hiring target of $950,000 where vacancies must be justified before hiring. In addition, departments across the general fund were asked to make collective operating cuts totaling $100,000, and staff removed an estimated $611,000 that had been included for inflation in the initial forecast, for combined departmental reductions staff quantified at $711,000.

Staff also highlighted tax-increment financing and grant-related steps that affect the forecast. The Transportation Reinvestment Zone (TRZ) for FM 110, staff said, will close by state statute on Dec. 30, 2026; the city estimates it can transfer about $4.8 million from that TRZ into the general fund in FY26. Tax increment reinvestment zone No. 3 (associated with the conference center) and certain lease payments, staff said, would free roughly $653,000 to the general fund as debt is defeased.

Council members asked for clarifications throughout the presentation about the sales-tax trends, the use of one-time funds, and how department budget cuts were allocated. Staff said the department cuts were determined by examining each department’s average unspent budget over a three-year period and applying a proportionate share so that larger unspent balances bore larger shares of the $100,000 collective cut. Staff also noted that public-safety staffing and minimum staffing requirements remain a consideration and that exceptions have been made in the past for unavoidable contract increases.

Staff walked the council through impacts on a typical homeowner under the different tax-rate scenarios. Using an example average homestead value, staff showed how assessed values declining would push the “no new revenue” rate higher so the city collects the same levy from existing properties. Staff noted ongoing legislative changes to homestead exemptions that may affect homeowner bills but cautioned that those state actions do not solve the city’s structural revenue needs.

Staff emphasized timing and next steps: the certified tax roll is expected in July; staff will present a draft budget for all funds at a subsequent workshop; the budget will be submitted to council on Aug. 19 and adoption of budget and tax rate is scheduled for September with a minimum of four public hearings (two on the budget and two on the tax rate). Staff also said the police staffing analysis (“PD 1”) will be on the June 3 work session.

Council and staff repeatedly framed the choice as between short-term balancing and creating a structurally balanced budget that maintains long-term service levels. “We are at a fork in the road,” staff said, describing the difference between a budget that is balanced for a single year and one that is structurally sustainable over time.

The presentation included illustrative impacts of changes in the tax rate: staff said 1¢ on the tax rate would pay for roughly five police officers (including vehicles and equipment), nearly an entire code-compliance budget, two neighborhood paving projects, almost half the animal shelter cost, and about a third of the library’s budget.

No formal votes were taken at the work session; council directed staff to continue work on the fiscal forecast and to return with additional analysis and options consistent with the schedule described by staff.