MANKATO — For decades, growth in Mankato’s tax base — driven by new retail stores, apartment complexes, distribution centers and additional housing subdivisions — has made city budgeting a bit less challenging than it otherwise might have been.
When new construction generates new property tax payments, the city budget can rise without the full impact being felt by existing homeowners and businesses.
But the growth in the local tax base appears to be slowing, which means potentially tougher choices for Mankato city leaders as a 2026 municipal budget is drafted this summer and approved late this autumn.
“I know it’s just June and we’re talking about the 2026 budget. You’re welcome,” City Manager Susan Arntz joked when kicking off the earlier-than-normal start to the annual budgeting process.
The accelerated schedule is partly about getting a head start on digging out of a fiscal hole created by that less vigorous pace of new development.
When the City Council approved its 2025 budget last December, along with a preliminary 2026 budget, the expectation was for 3% growth in Mankato’s net tax capacity for next year. Blue Earth County tax assessors, although they won’t provide official estimates for more than a month, are currently projecting the increase to be just 1.28% for 2026.
Under existing assumptions for the 2026 budget, without other adjustments, that would leave a $550,000 shortfall in the general fund. It’s not a huge amount in the context of a 2025 general fund budget of more than $35.5 million, and the early start to budget talks means there’s time to make tweaks to erase the red ink.
But there’s no magic fix, Arntz said during the initial discussion of the 2026 budget on June 23.
“We don’t have the money tree in the landscaping plan,” Arntz said. “… We’d have to cut $550,000 or raise $550,000.”
Simply raising the property tax levy to generate that much added revenue would bump up the levy increase by more than 2 percentage points. Alternatively, cutting staff by that amount would equate to laying off more than four police officers or firefighters.
Another reason to start early was to give council members a more realistic chance to add a new initiative to the 2026 budget, said Administrative Services Director Parker Skophammer.
He recalled instances when council members — during the traditional September bus tour of municipal construction projects — contemplated adding projects to the following year’s construction list. But September is very late in the planning process to add a major new expense, particularly since the council is legally required to set a ceiling for any property tax increases that same month.
This year Skophammer and Arntz are hoping council members will bring any suggestions for additional projects or initiatives to the administration by the second week in July.
During the initial budget work session, Skophammer laid out all of the projects tentatively scheduled for 2026, asking the elected officials to think about whether any of their highest priorities are missing.
If there’s a consensus on the council to add items, those adjustments could be made before the administration’s proposed budget is presented in August — possibly pushing a lower-priority project off the list and into a future year.
Although budgetary challenges were highlighted, there was plenty of positive news provided by Skophammer, who has been working on the 2026 budget since April.
For instance, efforts over several years to eliminate any structural imbalances in city accounts — such as the airport and the civic center budgets — have been successful. Now the amount of revenue and expenditures match in every account, avoiding the need to transfer funds from reserves or from more flush departments to fill gaps in other areas.
“Every fund, we are meeting our fund balance goal,” Skophammer said.
In addition, money is being set aside each year in capital reserve accounts to cover the anticipated long-term repair costs for all municipal buildings and facilities — the only exception being the aging downtown parking ramps.
“It wasn’t that many years ago, we couldn’t say those things,” Arntz said.
Skophammer and Arntz, with the support of the council, also have deviated in recent years from the previous approach of routinely approving budgets that retained the same property tax rate year after year. The old approach automatically ratcheted up property tax revenue by the amount the tax base grew. But since only part of that tax base growth was generated by new construction, with much of it coming from valuation increases on existing properties, owners of homes and businesses saw their municipal taxes rise steadily, too.
Under the new strategy, the tax rate has been lowered a bit with each new budget to ease the burden on property owners who are facing rising valuations. Mankato’s tax rate is now 39.47% rather than the 44.31% rate that would have been in place if the old approach had been maintained.
“That’s been a savings to the citizens over three years of $7,884,000,” Skophammer said.
The city’s budget reserves are healthier, too. Overall reserves now equal 49% of annual spending in the general fund, easily abiding by the city’s policy of maintaining those reserve funds at a level between 40% and 55% of expenditures. As recently as 2023, budget projections showed the reserves at no more than 40.8% over the upcoming five-year period — barely above the amount that might prompt concern by bond rating agencies.
Maintaining Mankato’s lofty AA bond rating means lower interest rates when borrowing money for construction projects.
“And that equates to savings,” Skophammer said.