Watertown City Council Reviews Sales Tax Trends, Debt, Capital Projects, and New Revenue Options in 2026 Budget Work Session

Northeast Radio SD News - Watertown, SD - On Monday, the Watertown City Council, led by Mayor Ried Holien and City Manager Alan Stager, held a work session Monday afternoon to begin shaping the city’s 2026 budget. The meeting, which began at 4 p.m., focused on sales tax trends, debt levels, capital projects, council priorities, and potential new revenue sources.

Sales Tax Trends: Growth Driven by Inflation and Population

City Manager Alan Stager opened with an analysis of sales tax receipts dating back to 2021. While gross revenues have risen steadily, much of this growth can be attributed to inflation. Adjusted for inflation, sales tax revenues have remained relatively flat over the past four and a half years.

Still, 2025 has been a strong year. Comparing the first seven months of 2025 to the same period in 2024, Watertown’s first and second penny sales tax revenues are up nearly 7%. Of that, 2.6% is attributed to inflation, while 4.1% represents real growth.

“We’ve been having a pretty good year,” Stager said, while cautioning against overestimating future growth. “It’s prudent not to assume that overdriving our sales tax projections is going to continue indefinitely.”

The “Second Penny” and Capital Spending

Stager reviewed how the city’s second penny sales tax, dedicated to capital improvements, is allocated. In 2025, the city budgeted $10.8 million in second-penny revenue but expects to finish with a total closer to $11 million. With additional state and intergovernmental transfers, total capital revenue is projected at $13–14 million annually.

Of that, roughly $5–$ 5.4 million per year is allocated to debt service. Watertown will carry about $55 million in debt tied to the second penny fund by the end of 2025. The remaining funds are allocated to public works, culture and recreation, public safety vehicles, and smaller development projects.

Street Facility Proposal

A significant highlight was the discussion of a proposed new street facility, estimated at $10.6 million. Stager said the project could be funded without new bonds, using $7.1 million from prior bond proceeds and $3.5 million in cash on hand.

“This proposal would allow our debt service to decrease to about 38% of revenues in 2029,” Stager explained, noting that the council’s target has been to stay below 40%.

Council members, including Doug Allen and Kyle Peters, voiced support for keeping the project at the top of the city’s priority list.

Debt Levels and Paydown

Beyond the street facility, Stager reviewed the city’s overall debt. In addition to the $55 million in sales tax debt, Watertown carries approximately $20 million in wastewater loans and $7 million in municipal utilities debt, both of which are serviced through utility charges.

The city’s next major debt maturity is in 2035, when annual debt service is expected to drop below $3 million—approximately 20% of revenues. Stager advised against early repayment of smaller issuances, noting that current rates are as low as 2%.

2026 Capital Improvement Plan

The draft 2026 Capital Improvement Plan (CIP) includes:

·        Fifth Avenue North Reconstruction — $3.1 million.

·        Additional Street Maintenance — $874,000 for repairs after winter.

·        Trail Projects — $350,000.

·        River Ridge Park — $250,000 to complete the new park.

·        Zoo Improvements — $200,000 as part of a three-year accreditation plan.

·        Recurring Public Safety Investments — including three new patrol cars.

Councilman Brent Mohrmann thanked staff for ensuring funds were available for ongoing street maintenance beyond the Fifth Avenue project.

Council Priorities: Narrowing the List

The council reviewed its list of 19 priority projects, which ranged from an east-side fire station to downtown amenities. Stager recommended narrowing the list and forming small working groups of council members to scope projects in detail.

Projects discussed included:

·        East Side Fire Station — no funding yet identified; may require grants and new revenue sources.

·        Big Sioux Flood Control — placeholder until federal reports are finalized.

·        Housing Initiatives — potential land contributions and utility partnerships.

·        Baseball Stadium — currently leased from the school district; long-term future must be decided before the lease expires.

·        Event Center Improvements — tenant obligations exist, but revenues may not support major upgrades.

·        MAAS Facility — proposals expected soon, with potential city costs under $1 million.

·        Foundation Plaza Ice Sheet — debated, with some members questioning the wisdom of adding ice just two years after construction.

Councilman Michael Heuer urged the council to distinguish between projects that are immediate threats and those that can continue to function without urgent investment.

Councilman Dan Schutte added that trimming the list would make prioritization easier.

Drainage and Growth Goals

The council also revisited the Highland neighborhood drainage issue, a $9 million project first studied in 2021. Councilman Kyle Peters noted that Watertown Municipal Utilities is already planning to replace water lines in the area, suggesting coordination to avoid duplicate street work.

The discussion tied into broader concerns about population growth. Watertown has been growing at about 1% annually, but Stager said a 3% growth rate is needed to sustain capital projects.

Councilman Lynn Jurrens emphasized the importance of housing density and infill development to support growth without overextending infrastructure.

New Revenue Possibilities

Stager presented several potential revenue tools for consideration:

·        Street Frontage Assessment — $131 annually for an average lot.

·        Stormwater Assessment — $3 per month on utility bills, raising up to $1 million annually.

·        Fire/Medical District Fee — to fund ambulance service outside city limits, where 80% of calls occur.

·        Utility Infrastructure Debt — leveraging Watertown Municipal Utilities’ low debt levels to finance growth.

·        User Fees — including a possible pet license fee to support animal control.

·        General Obligation Bonds — serviced by property taxes, offering stable revenue for major projects.

·        Grant Funding — pursuing larger-scale grants such as community development block grants.

Councilman Doug Allen cautioned that any GO bond must be tied to projects that offer clear community benefits. Councilman Michael Heuer stressed that user-choice fees, such as pet licenses, may be more palatable than broad-based taxes.

Mayor Holien concluded that any new revenue must be tied to a clear vision: “If you can sell me on the vision of where we’re going as a community, I’ll go to bat for it. But raising money just to ease pressure on one fund isn’t sufficient planning.”

Next Steps and Adjournment

The council agreed to submit recommendations on which projects could be removed from the priority list and to identify which groupings they would like to work on. Small cohorts of council members will then collaborate with staff to refine project scopes.

The next budget work session was scheduled for Oct. 15, moved from Oct. 14 to avoid a conflict with the Watertown Development Company’s annual meeting.

With no further business, the council adjourned on a motion by Councilman Doug Allen, seconded by Councilman Kyle Peters.

Key Takeaways

·        Sales tax growth in 2025 is strong, but much of it is inflation-driven.

·        A $10.6 million street facility could move forward without new bonds.

·        Debt levels are stable, with significant maturities not until 2035.

·        The 2026 CIP prioritizes Fifth Avenue North reconstruction and park/zoo projects.

·        Council will trim its 19 priority projects and form working groups.

·        New revenue options—including assessments, fees, and bonds—are under discussion.

·        Population growth remains central to Watertown’s long-term financial health.

City of Watertown stream of work session Monday 9/22/25