photo by: Shawn Valverde/Special to the Journal-World

Downtown Lawrence, looking north, is pictured in this aerial photo from September 2023. South Park is at the bottom of the photo. The Judicial and Law Enforcement Center is the large beige building at right.

When Lawrence city commissioners conduct the city’s 2025 budget hearing on Tuesday, most casual observers likely will have a single question: What’s it going to do to my taxes?

Observers who are slightly more engaged might also have a question about the future of the city’s fire and medical department. The proposed budget would reduce the number of firefighters staffing a truck from four to three, in most situations. That has been met with stiff opposition from local firefighters.

The answer to the first question is unknown, but straightforward: The city’s property tax rate could increase by as much as 3.5 mills, but city commissioners also could decide to back away from that recommendation. A 3.5 mill increase on a $300,000 home amounts to about a $120 per year increase in city property taxes.

As for the firefighter issue, city commissioners have gotten an earful about safety concerns created by the potential reduction. Commissioners 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 leading questions for Tuesday night, I think there are three other questions that this budget is daring city commissioners to answer. They are questions that could have implications for the longterm, if commissioners choose to debate them. Here’s a look:

— How aggressive should the city be with sales taxes? Sales taxes are the largest source of funding for the city’s general operations. The trick with sales taxes is you have to estimate how many sales tax dollars you are going to collect in the next year. Predicting the future is hard, and if reality falls short of your budget prediction, it can create a shortfall that leads to financial difficulties at City Hall.

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

Further, in the summer of 2023, it predicted sales taxes in 2024 were going to grow by 8%. That’s despite the fact that in the summer of 2023, sales taxes were growing at a rate of 4.6%. The city’s 8% sales tax projection didn’t come close to panning out. Sales taxes thus far in 2024 have grown by just 1.6%.

Now, the city has to decide how aggressive it wants to be in predicting sales tax revenues for the rest of 2024 and all of 2025. The city is projecting sales taxes in 2024 to grow by 2.8%. As I mentioned above, with seven months of the year already in the books, they are up just 1.6%. Looking ahead to 2025, the city is projecting sales taxes to grow at 3.2% — in other words, twice the rate they are growing at currently.

Is that too aggressive? I’ll say again, predicting the future is hard. I don’t know how much — if at all — sales taxes will grow in the months ahead. But, I did do the math on what happens to the city’s budget if the growth rate remains at 1.6% for all of 2025: The city would be facing a $2.65 million shortfall in sales tax revenues. If that comes to be, the city would face a second straight year of tax increases, budget cuts or a combination of both.

The alternative is for the city to become more conservative in predicting sales tax revenues, but people who hate property taxes likely won’t love that option. Governments that become very conservative in projecting sales tax revenues usually have higher property tax rates.

— How much rain do we need to plan for? As I’ve reported, a good portion of the proposed property tax rate increase for 2025 would be used to bolster a key rainy day savings account of the city. The city is proposing to use $3.44 million in tax revenues to increase the balance in its general fund account. That is an account used to help with downturns and other unexpected costs.

If the city decided not to bolster that account, the size of the property tax rate increase could drop from 3.5 mills to about 1.25 mills. If the city followed that course, the rainy day account would have just under $24 million at the end of 2025 rather than the approximately $27 million proposed by the city manager.

The question here is what is the right amount for comfort? The city has a policy that says the fund should have enough money in it to cover 90 days of expenses, but the same policy also says the city is not obligated to bolster the fund as long as it has a balance large enough to cover at least 60 days of expenses.

If commissioners declined to bolster the fund in 2025, it would have 74 days of operating expenses on hand. If it uses the property tax rate increase to add $3.4 million to the fund, it would have 84 days of operating expenditures on hand.

You could make an argument for either path. The city would still be in compliance with its policy by declining to bolster the fund, and it would reduce the size of a property tax increase. But, by not bolstering the fund, the city could be headed down the proverbial slippery slope. Will the city have the fortitude to raise property taxes if the fund does dip below the 60-day mark next year or beyond?

The City Commission has spent very little time talking about its fund balance policy, but its implications are measured in the millions of dollars.

— Is it time for the city to restructure its sales taxes? The city has two types of sales taxes: One sales tax that can be used to fund any activity related to the government, and three sales taxes that can be used only to fund specific types of activities. Those activities are public transit, affordable housing and infrastructure improvements, meaning everything from streets to firetrucks.

The specific sales taxes tie the city’s hands in some ways. A look at the public transit fund begins to show how. The public transit fund is budgeted to end 2025 with $7.9 million in its rainy day fund balance account. That is the equivalent of 498 days of expenditures. The city’s policy for this particular account only calls for the city to keep a balance equal to 60 days of expenditures.

A new hybrid diesel-electric bus is shown in this 2011 file photo.

However, looking at these fund balances can be deceiving. Many times the city will have a large fund balance in one of these speciality funds, with the idea that the city will use the excess funds to pay for a certain project in future years. In that case, it is really a misnomer to call it a rainy day fund. It is partially a rainy day fund and partially a college savings account — a fund where you are accumulating cash for a future, expected expense.

But in the case of the transit fund, it is not clear what that expense is. The city lists its expected projects on a document called its five-year capital improvement plan. The CIP currently does not anticipate using any of the excess transit funds from 2026 through 2029.

I reached out to city officials midday Monday for any information about how the city intends to use those excess transit funds. However, I didn’t receive any details. Perhaps there is a plan, but it is not clear what it is looking at the budget. (UPDATE: 2:15 p.m. Aug. 20: A city official told me via email the city has an “internal fund balance goal” of trying to keep $5 million in the fund balance of the transit fund. That $5 million amount is roughly equal to the amount of federal and state grants the city receives to operate the transit system, thus the $5 million reserve could cover a year’s worth of operation if that grant funding were interrupted. The city’s official fund balance policy doesn’t call for that level of reserve in the transit fund. The city official didn’t provide details on the planned uses for the approximately $3 million that is currently in the fund over and above the $5 million mark.)

Some will argue that is a lot of money for the city to have sitting in reserve without a specific plan for spending it, especially during a time when the city is proposing both a property tax increase and a sales tax increase.

Some will question why the city doesn’t just use some of the excess transit funds to fund other things and thus lessen or eliminate the need for a tax increase. The answer is that the wording of the sales tax won’t allow it. Like all sales taxes, this one had to be voted on by the city at large. The ballot language says the money must be used only for public transit-related purposes.

If the city wanted to remove that restriction, it would take another citywide election to do so. The city would have to propose an election to repeal the existing transit tax and replace it with a new, general purpose sales tax of the same amount. The city, in practice, could use that general sales tax to fund transit operations just like it does today. A key difference is that if the tax produced excess funds, it could use those excess amounts in any ways the city deemed appropriate.

There is one other difference, of course: The city would no longer have a guaranteed source of funding for transit operations. A future City Commission could much more easily decide to stop funding the public transit system. As someone who covered the creation of this tax in 2008, I know supporters were worried about that possibility. That’s why they wanted the tax to be specifically for transit.

That structure has some benefits, but one of its costs may be a loss of flexibility for city budget makers. Less flexibility may increase the pressure for tax increases in other areas.

This is a complex question that commissioners aren’t likely to solve at a single Tuesday evening meeting. But now seems like a time to ask it. In addition to the property tax increase, the city’s recommended budget calls for 0.05% increase in the city’s affordable housing sales tax. If the city could spend some of its transit dollars on other uses, would that affordable housing sales tax increase be needed?

City commissioners will conduct the 2025 budget hearing as part of their 5:45 p.m. meeting Tuesday at Lawrence City Hall.