Iowa City Council begins fiscal 2023 budget decisions amid headwinds

IOWA CITY — As the Iowa City Council begins budget discussions and decisions for the future, City Manager Geoff Fruin emphasized how important the upcoming fiscal 2023 budget is.

“All these discussions are important, but this is certainly going to be the toughest budget year that we've had since I've been here in the last decade,” Fruin told the council during a work session earlier this month. “The decisions this year will set the table for probably even a tougher budget year next year.”

Some of the budget challenges the city knew were coming — such as a property tax reform — but other factors weren’t anticipated to have such an impact, Fruin said.

The more-than 700-page proposed fiscal year 2023 budget — which takes effect July 1 and ends June 30, 2023 — represents $194 million in all expenditures. The fiscal year 2022 budget approved last year was $173 million.

The general fund is about one third of the total budget — $64 million — and includes services such as police, fire, parks and recreation and general government. General fund operations are supported by property taxes, which account for 69 percent of total revenue.

“Throughout the budget compilation process, allocating funding for priorities was balanced with recognition that the financial impacts of the pandemic continue, taxable property values have plateaued and significant financial pressures associated with state property tax reforms will be felt in the coming fiscal years,” Fruin wrote in his budget address.

Challenges

The Iowa Legislature passed a law last year phasing out the “backfill” state aid to local governments put into place with along with a historic 2013 property tax reform. Iowa City’s annual backfill of $1.5 million now will be phased out over five years, starting in fiscal 2023.

The city will lose about $340,000 in fiscal 2023, Fruin said. Cumulatively, the impact will be a loss of $7 million over five years, he added.

Another challenge from the 2013 reform bill Fruin brought up is the multi-residential property tax. “This piece hurt us quite a bit,” Fruin said, adding the impact is greater on college towns like Iowa City due to them having more multi-residential property.

Multi-residential properties — such as apartments — were treated as commercial buildings before 2013, meaning taxes were paid on the full building value. After the reform, multi-residential properties were taxed a rate that fluctuated and decreased each year, from 95 percent in fiscal 2015 down to 63.75 percent in fiscal 2023. Come fiscal 2024, the multi-residential rollback rate on which taxes are partly calculated will be the same as the single-family residential rate — a “huge loss to us,” Fruin said.

“You look at the cumulative effect over this since the property tax bill was passed, it's close to a $14 million hit to us” through fiscal year 2023, Fruin said.

Proposed garbage increase

The budget proposes a property tax rate of $15.63 per $1,000 of taxable valuation, the city's lowest rate since fiscal 2002.

The owner of a $100,000 house will pay $846 in city property taxes in fiscal 2023, a decrease of $38 from the last fiscal year.

Assistant City Manager Rachel Kilburg said the city expects to stay around this property tax rate going forward.

The city also is recommending a $3 per month increase in refuse collection, Fruin said. There are no recommended increases to water, wastewater, transit, landfill or stormwater.

The budget recommends a “modest addition” of the equivalent of 3.74 full-time city employees, including a full-time maintenance worker for the refuse department to keep up with increased curbside service demand and costs.

Long-term investments

The council last year discussed budget priorities for the upcoming fiscal year, identifying affordable housing, child care and climate action.

Fruin brought up budget initiatives the council has accomplished in the last few years due to “robust growth in our taxable valuations,” which has allowed flexibility to take on new initiatives. Some examples include committing $1 million in annual funds for new climate action initiatives and setting aside $1 million to fund racial equity initiatives.

Challenges in the fiscal 2023 budget “place limits on flexibility to pursue such bold investments over the next several fiscal years,” Fruin wrote. “This budget demonstrates a balanced approach of fiscal prudence with continued commitment to major priorities.”

Notable investments include:

The council will hold a public hearing on the proposed budget and adopt a resolution setting the maximum property tax on Feb. 15. A month later, on March 15, council will hold a public hearing and adopt the budget.

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