Lexington’s proposed budget for 2026-27 contains a difference of more than $12 million between the city’s anticipated revenue and its budgeted expenses in the upcoming fiscal year, which will have to come from the city’s reserve funds.
In a memo to Council summarizing the budget ahead of a work session on March 6, City Manager Tom Carroll noted that “careful financial stewardship” by the city over the past several years has left Lexington with “strong financial reserves” which the city can utilize to cover the difference between revenues and expenses in the next fiscal year.
Carroll continued, noting that Lexington is “approaching a fulcrum point,” and “will have to find a new equilibrium to rebalance” three key areas of the city’s finances: affordable utility and tax rates for all, the need to replace aging infrastructure and providing competitive wages and benefits for “our diligent municipal and school employees.
“Funds have been carefully set aside over the last six or so fiscal years to pay for planned utility projects and public facilities improvements,” he said. “But going forward, and for the foreseeable future, these conscientiously set aside reserves will be drawn down rather than augmented. We have some time to find this equilibrium, but the sooner we do so, the better off our community’s financial footing will be.”
The proposed budget anticipates $58,466,489 in expenses in the next fiscal year, including more than $31 million in operational expenses and more than $19 million in capital projects. This is an increase over last year’s budgeted $42,271,161 in expenses. In the March 6 memo, Carroll noted several upcoming financial challenges for the city, some of which have contributed to the increase in the city’s budget.
Among the increases are pay increases for some city staff and increases in health insurance premiums, which showed a 25 percent increase from last year’s budget, which will mean “changes to our employee healthcare offerings and a greater degree of premium cost sharing from our employees.”
Carroll noted the strain that inflation is placing on city employees and that the city needs to “keep competitive wages and benefits to compensate, recruit, and retain high quality people.”
As a result, the draft budget “faces wage and healthcare cost pressures in a way not seen for a number of years.” While the proposed budget has a total of $5,697,408 for wages for full-time employees (up from $5,452,685 budgeted in FY26) and $112,250 for part-time wages (also up from the $98,750 in last year’s budget), the budget for overtime wages is decreasing from $291,000 in FY26 to $204,973 in FY27, as are the budgeted funds for benefits like health insurance ($1,148,399, down from $1,159,361), life insurance ($60,743, down from $72,988) and retirement benefits ($612,359, down from $676,590).
There are also challenges on the revenue side of the budget. The interest being earned on the city’s treasury is decreasing due to a cut in interest rates by the Federal Reserve last year, and the city also brought in less revenue than anticipated from the lodging tax in FY26. The draft budget anticipates $700,000 in revenue from lodging tax in the upcoming fiscal year, down from the $829,000 adopted in last year’s budget.
While the budget anticipates increases in revenue from sales and meals taxes -- $35,000 and $13,000 more than last year’s budget, respectively – anticipated revenue from local taxes (other than real estate and property taxes) is anticipated to be a little over $5.56 million, down from the $5.6 million budgeted last year.
While there is no proposed rate change for property or real estate taxes, revenues from those taxes is expected to increase by $62,678 from $7,929,856 in FY26 to $7,992,534 in FY27, including $6,336,163 in current real estate taxes and $1,235,532 in current personal property taxes. The city is in the process of completing a reassessment for real estate taxes, the results of which will be provided to the city sometime this month.
The city will also see increased revenues from the stormwater utility fee as the rate for the fee will increase from 30 cents per 250 square feet of impervious surface to the full rate of 60 cents per 250 square feet of impervious surface, bringing in $416,000 in revenue for the city’s stormwater utility fund.
There is also a proposed increase in water and sewer rates of 8 percent, which will bring in an anticipated $664,854 of additional revenue over last year’s budget (from $8,340,680 to $9,005,534). The proposed rate increase would mean that the minimum charge for water for customers who live inside the city will increase from $44.16 to $47.69, and the minimum charge for customers living outside of city limits will increase from $59.62 to $64.39.
Lexington City Council held a public hearing on the draft budget and the agency funding requests at its meeting last week. No one spoke on the proposed draft budget, though several representatives of several local non-profit agencies addressed council regarding their funding requests.
Council will hold a joint work session with the Lexington City School Board on April 21 to discuss the school’s portion of the city budget and will hold a public hearing on an appropriation resolution at its May 21 meeting after which Council will hold a vote on appropriating the funds for the fiscal year.
