Photo by: Shawn Valverde/Special for the Journal-World

In this September 2023 aerial photo, downtown Lawrence is seen looking north. South Park is at the bottom of the image. The Judicial and Law Enforcement Center is the large beige building on the right.

When Lawrence City Councilors hold their 2025 city budget hearing on Tuesday, most casual observers will likely have just one question: What impact will this have on my taxes?

Observers who are a little more involved might also have a question about the future of the city’s fire department and medical department. The proposed budget would reduce the number of firefighters per vehicle from four to three in most cases. This was met with fierce opposition from local firefighters.

The answer to the first question is unknown but clear: The city’s property tax could increase by as much as 3.5 percent, but city councilors could also decide to deviate from that recommendation. A 3.5 percent increase on a $300,000 home is equivalent to an increase in city property tax of about $120 per year.

As for firefighters, councillors have already heard a lot about safety concerns raised by the potential reduction. Councillors could reject the recommendation and stick with four firefighters as the standard, but they may have to make cuts elsewhere in the budget to fund it.

While those two questions may be the most important questions for Tuesday night, I believe there are three more questions that the city commissioners need to answer with this budget. They are questions that could have long-term implications if the commissioners choose to discuss them. Here’s an overview:

– How aggressive should the city be with sales tax? Sales tax is the largest source of funding for general city operations. The trick with sales tax is that you have to estimate how many sales tax dollars you will collect next year. Predicting the future is difficult, and if reality falls short of your budget forecast, it can result in a deficit, causing financial difficulties at City Hall.

As I detailed last month, such a sales tax shortfall is a big reason the city is under pressure to raise taxes in the 2025 budget. In short, the city thought it would collect $56.9 million in sales tax in 2023. Instead, it collected $51.9 million.

In addition, in the summer of 2023, it predicted that sales taxes would increase by 8% in 2024. This despite the fact that sales taxes increased by 4.6% in the summer of 2023. The city’s 8% sales tax forecast has not come close to being true. So far, sales taxes have only increased by 1.6% in 2024.

Now the city must decide how aggressive it wants to be in forecasting sales tax revenues for the rest of 2024 and all of 2025. The city is forecasting a 2.8% increase in sales tax in 2024. As I mentioned above, seven months into the year, they’re only up 1.6%. For 2025, the city is forecasting a 3.2% increase in sales tax – twice the current rate.

Is that too aggressive? I’ll say it again: Predicting the future is difficult. I don’t know how much – if at all – the sales tax will increase in the coming months. But I’ve calculated what would happen to the city’s budget if the growth rate remained at 1.6% for all of 2025: The city would have a $2.65 million deficit in sales tax revenue. If that happens, the city would face a second year in a row of tax increases, budget cuts, or a combination of both.

The alternative would be for the city to become more conservative in forecasting sales tax revenue, but people who hate property taxes probably won’t like that option. Governments that are very conservative in forecasting sales tax revenue tend to impose higher property tax rates.

— How much rain should we expect? As I reported, much of the proposed 2025 property tax increase will be used to bolster a critical city emergency fund account. The city is proposing to use $3.44 million in tax revenue to increase the balance in its general fund account, which is designed to help with economic downturns and other unexpected costs.

If the city decided not to increase this account, the property tax increase could drop from 3.5 per thousand to about 1.25 per thousand. If the city went this route, the emergency fund account would be just under $24 million at the end of 2025, instead of the roughly $27 million proposed by the city manager.

The question here is what amount is appropriate to cover the costs. The city has a policy that says the fund should have enough money to cover 90 days of expenses. However, the same policy also states that the city is not obligated to add to the fund as long as there is a sufficient amount to cover at least 60 days of expenses.

If commissioners declined to bolster the fund in 2025, 74 days of operating expenses would be available. If commissioners use the property tax increase to add $3.4 million to the fund, 84 days of operating expenses would be available.

One could argue for either path. The city would still be adhering to its policy if it did not replenish the fund, and it would reduce the amount of a property tax increase. But if it does not replenish the fund, the city could be on the proverbial slippery slope. Will the city have the strength to raise property taxes if the fund does indeed fall below the 60-day mark next year or later?

The City Commission has only briefly addressed its fund balance policy so far, but its implications are in the millions.

— Is it time for the city to restructure its sales tax? The city collects two types of sales taxes: one sales tax that can be used to fund all government activities, and three sales taxes that can only fund certain types of activities. Those activities are public transit, affordable housing, and infrastructure improvements, so everything from roads to fire trucks.

The specific sales taxes tie the city’s hands in some ways. A look at the public transit fund shows how. The public transit fund has a balance of $7.9 million through the end of 2025. That’s 498 days of expenses. The city’s guidelines for this special account only require the city to maintain a balance equal to 60 days of expenses.

This archive photo from 2011 shows a new hybrid diesel-electric bus.

However, looking at these fund holdings can be misleading. Often, the city will have a large fund holding in one of these special funds and assume that the city will use the excess funds to finance a specific project in the coming years. In this case, calling it a “nest egg” is really a misnomer. It is part emergency fund and part student savings account – a fund where you save cash for a future, expected expense.

In the case of the transit fund, however, it is not clear what the costs are. The city lists its planned projects in a document called the Five-Year Capital Improvement Plan. The CIP does not currently anticipate using any excess transit funds between 2026 and 2029.

I contacted the city administration on Monday afternoon to get information on how the city plans to use the surplus funds for public transit, but I have not received any details. There may be a plan, but it is not clear what is included in the budget.

Some will argue that’s a lot of money the city has in reserve without a concrete plan for how to use it, especially at a time when the city is proposing both a property tax increase and a sales tax increase.

Some may wonder why the city doesn’t just use some of the excess transit funds to fund other things, thus reducing or avoiding the need for a tax increase. The answer is that the wording of the sales tax doesn’t allow that. As with all sales taxes, this one had to be voted on by the entire city. The wording of the ballot states that the money can only be used for purposes related to transit.

If the city wanted to remove this restriction, it would have to hold another citywide election to do so. The city would have to propose an election to eliminate the existing transit tax and replace it with a new, general sales tax of the same amount. In practice, the city could use this general sales tax to fund transit operations, just as it does today. One important difference is that if the tax raises excess funds, the city could use those excess amounts in any way it sees fit.

Of course, there’s another difference: The city would no longer have a guaranteed source of funding for public transit. A future city commission could much more easily decide to stop funding public transit. As someone who watched the tax’s passage in 2008, I know that proponents were concerned about that possibility. That’s why they wanted the tax to be specifically for public transit.

This structure has some advantages, but one of its disadvantages could be a loss of flexibility for city budget planners. Less flexibility could increase pressure for tax increases in other areas.

This is a complex question that commissioners are unlikely to resolve in a single Tuesday night meeting. But now seems like a good time to ask it. In addition to the property tax increase, the city’s proposed budget calls for a 0.05% increase in the city’s affordable housing sales tax. If the city could spend some of its transportation funds on other purposes, would this increase in the affordable housing sales tax be necessary?

City commissioners will hold a hearing on the 2025 budget during their meeting on Tuesday at 5:45 p.m. at Lawrence City Hall.