Staff and the Budget and Finance Committee recommend the City Council approve the resolution directing staff to proceed with budget development under MCA 15-6-401(4)(a).

The 2025 legislature enacted legislation to reform property taxes, introducing reduced rates for residential and commercial properties while aiming to maintain local government revenue neutrality. These changes impact the City of Billings uniquely due to its charter-imposed fixed mill levy limits (effective in 1977 with voter amendments), which prevent automatic upward adjustments unlike all other Montana cities.

State law (MCA 15-6-401) supersedes conflicting charter limits for taxing purposes. The City set its FY2026 mills via resolution 25-11286 (August 25, 2025) to achieve revenue neutrality for that year.

However, MCA 15-6-401(3) contains contradictory language applicable only to the cities of Billings & Sunburst: it requires mills to generate FY2025 revenue indefinitely but caps mills at FY2026 level. Projections show declining mill values in tax year 2026 (FY2027) due to full rate reform implementation, making compliance impossible without mill increases that the cap prohibits - causing revenue shortfalls.

MCA 15-6-401(4) provides two options for taxing entities with voted mill levy limits:
(a) Transition to a dollar-based limit, then subject to 15-10-420 inflation adjustments.
(b) Fix mills permanently at the FY2026 level needed for FY25 revenue.

City staff and Budget and Finance Committee recommend electing option (a) for greater flexibility, revenue stability, and alignment with long-standing state limits.

A proposed resolution provides direction to staff for FY2027 budget development under option (a), while preserving the Council's final election when setting FY2027 mills in August/September 2026. 

The 2025 legislature passed HB231 & SB542, which significantly transformed property taxes in Montana that uniquely affected the City of Billings. 

In 1977, the voter-approved Billings charter became effective. The charter contained language limiting the number of mills that could be levied by the City Council. Over time, amendments were approved by voters to add additional mill levy limits to the Charter. In 1999, the state legislature enacted property tax limits for all local governments, which were codified in MCA 15-10-420 and also referenced in the "mandatory provisions" section, MCA 7-1-114. The limits established by the state of Montana generally allow local governments' property tax revenue to grow by 1/2 the rate of inflation year over year. In 2001, the legislature amended the "mandatory provisions" section to further clarify that "The provisions of 15-10-420 apply to self-governing local government units." (MCA 7-1-114(3)(b)), so that local governments with self-governing powers could not levy higher property taxes than what was allowed by the State of Montana.

Since that time, the City has been required to operate within the provisions of 15-10-420, and additionally, past City Councils have followed the language in the Charter that even further limited their ability to tax. There has not been a time since the law was enacted in 1999 when the limitations within the Charter were contrary to the formula limitations allowed under 15-10-420. As a result of these two limitations, the citizens of Billings approved multiple Public Safety Mill Levies over the years to expand tax revenue for the City to add services. 

In 2025, the State Legislature passed legislation to address the property tax paid by residents of Montana. The legislature explicitly expressed its intention to supersede conflicting local charters (Billings & Sunburst) that set mill levy limits, to enable rate reductions without cutting local revenues. Specifically, MCA 15-6-401(2) says: "As a matter of policy, the legislature intends to supersede local government charters that fix mill levy limits for the limited purpose of exercising the power to tax while also maintaining local government revenue sources without raising taxes on residential taxpayers. Having considered all options on a statewide basis, the legislature finds the statutory structure of the property tax has evolved significantly since the passage of Initiative Measure No. 105 on November 4, 1986, and the enactment of 15-10-420 by the legislature in 1999. Given the significant change in the structure of the property tax and the rising cost of residential property in the last 5 years, there is a compelling interest to all the citizens of the state to lower residential property tax rates for primary residences, which can only be accomplished by this section and 15-10-420."

The legislation provided further instruction on how to transition from mill levy limitations that existed because of voter approval or those with charter limitations. MCA 15-6-401(3-4) provides the transition instructions and requires that local governments' mill levy limits previously imposed be adjusted to generate the same amount of revenue in fiscal 2026 that was generated in fiscal 2025. The City Council, on August 25th, 2025, approved resolution 25-11286 setting the FY2026 mill levy consistent with this first-year transition language.

After working through the initial transition, it became clear that the language in MCA 15-6-401(3) had contradictory language for future years. Specifically, the first sentence states that “A local government with a charter form of government that includes a mill levy limit of a specific number of mills that may be imposed in the charter shall levy the number of mills in fiscal year 2026 and subsequent tax years that will generate the amount of property taxes assessed in fiscal year 2025, without amending or revising the charter” (emphasis added).  This sentence means that in future years the local government should not realize less tax revenue than that which was collected in fiscal years 2025 and/or 2026. If the taxable value of a city were to drop below the value in 2026, the number of mills levied in 2026 would need to increase in order to achieve the same revenue. However, the very next sentence requires that those mills may not be increased over the FY2026 number.  “In fiscal years after 2026, the local government may levy an amount not to exceed the number of mills levied in fiscal year 2026.” (emphasis added).

The projections from the Department of Revenue indicate that the value of a mill in Billings will decrease in tax year 2026 (fiscal year 2027) from the value in tax year 2025 (fiscal year 2026). This is because the full implementation of this bill will result in residential property values decreasing a second time. If this occurs, it will not be possible to generate the same revenue in FY2027 as was collected in FY2025 & 2026 without increasing the total mills levied. In effect, this contrary language makes it impossible to comply with MCA 15-6-401(3). 

MCA 15-6-401(4), which applies to all taxing entities in Montana, does not contain this contradicting language. It provides for two options with respect to future years' taxing authority: "A taxing entity with a local mill levy limit of a specific number of mills that may be impose that was authorized by the voters before May 13, 2025, shall: a) elect to transition a voted mill levy to a dollar-based mill levy equal to the amount of property taxes assessed in fiscal year 2025 and thereafter subject to the provision of 15-10-420(1)(a); or b) levy the number of mills in fiscal year 2026 that will generate the amount of property taxes assessed in fiscal year 2025. In fiscal years after 2026, the local government may levy an amount not to exceed the number of mills levied in fiscal year 2026."

Because the City of Billings has been subject to MCA 15-10-420 since 1999, and the transition language in 15-6-401(3) cannot be complied with, the City of Billings staff and Budget and Finance Committee recommend the City Council make an election under 15-6-401(4)(a), and transition mill levy limitations subject to the provisions of 15-10-420(1)(a). City Council could elect to transition under the provisions of MCA 15-6-401(4)(b), but this will likely mean revenue reduction in Fiscal 2027, and place the City in a unique spot for any future property tax changes that the State legislature may make.

The proposed resolution will provide direction to staff on how to proceed with developing the FY27 budget. Council may make amendments when it formally adopts a budget in June and the final opportunity to change course will occur when Council sets mills for FY2027 in Aug/Sept. However, as we get closer to that point, it becomes more challenging to make changes if Council elects a different transition method, so staff is seeking direction early.

If the City Council elects to transition mill levy limitations under MCA 15-6-401(4)(a), and allow the tax revenue to grow by the 3 year average rate of inflation, the FY27 budget will be prepared assuming approximately a 3% tax revenue increase over FY26. This would mean an estimated increase of about $1.6 million.

If the City Council elects to transition mill levy limitations under MCA 15-6-401(4)(b), and cap the number of mills levied in future years at the total number that was levied in FY2026, the FY27 budget will be prepared assuming approximately a 2% decrease in tax revenue over FY26. This would be an estimated reduction of about $1.1 million.

From fiscal year 2025 to fiscal year 2026, the City of Billings experienced a 0% change in tax revenue as a result of the year 1 implementation of HB231 & SB542.

The two alternatives that are generally available to City Council are to (a) transition to a dollar-based mill limit and be subject to MCA 15-10-420 inflation adjustments or (b) fix mills at the FY2026 level, with no increases allowed in the future. Option (a) provides more flexibility for future revenue growth (via state limits), option (b) risks reduction in revenue if values decline.