The Free Press, Mankato, MN

July 23, 2013

Legislature hurt cities with tax change

Why it matters: Small towns around Minnesota face credit rating downgrades that may cause tax increases

The Mankato Free Press

---- — An in-depth report by The Free Press published Saturday suggests at least one national credit rating agency is losing a little faith in small-town Minnesota.

Moody’s Investors Service recently downgraded the credit rating of six Mankato area cities in the last 18 months. It downgraded a total of 40 cities statewide. That compares to one downgrade in 2011.

The report states the downgrades stemmed in part from steep declines in property values in those mostly small towns. But it also notes that some of that declined in property value was on paper, and the doings of the 2011-2012 Legislature.

Certainly small towns have to watch their bottom line like never before. Real estate markets have declined in recent years, though they are now coming back. Small towns have been squeezed, having to raise their levies in light of dwindling state aid, but they still needed to borrow to repair roads and do sewer projects.

The 2011-2012 Republican majority in both houses of the Legislature and Gov. Mark Dayton approved a change in the way property was valued. In essence, the mostly Republican plan that Dayton agreed to lowered values on paper. The assessed value of the properties were lowered in order to provide homeowners with property tax relief.

Most of the value decline through the Legislation aimed to provide tax relief to lower valued homes, and cities with a lot of lower valued homes took the biggest hit as a result.

Madelia’s total property value dropped 23 percent in 2012. Experts say about 84 percent of that decline was due to the change in the valuation law from the Legislature. Public finance experts and city officials are questioning the fairness of the downgrades given many were driven by circumstances beyond their control.

But Moody’s in an e-mail to The Free Press defends its downgrades saying property values were experiencing steep declines for several years. It also argued cities were not raising their levies when, as in the case of North Mankato, they had “the ability to do so.”

An unwillingness on the part of cities to increase their take in taxes also, according to Moody’s, has led to fiscal pressure on these cities.

The long-term implications for the downgrades will be severe for some cities. Le Center, already with nearly twice the debt per capita as the state average at about $6,000 per person, was mostly spending that money on the basics of government: road projects.

And it was willing to bite the bullet so to speak to take on the debt. It raised its levy 95 percent from 2009 to 2012. Its credit has been downgraded twice in the last 18 months so it is no longer investment grade. Banks generally don’t invest in anything below investment grade bonds so the number of groups willing to lend to Le Center is smaller. Borrowing costs therefore go up. While places like Mankato can get 1.9 percent interest rates on their bonds, Le Center pays about 3.5 percent.

The trend of downgrades especially in small-town, outstate Minnesota should be cause for concern to legislators in those districts and statewide. A change in the way property taxes are calculated appears to be one of the main reasons taxes are rising. The legislation had an impact opposite of what was intended.

This episode should be a very cautionary tale for legislators who are prone to jigger with local property tax law without understanding the full implications.

Small cities in Minnesota continue to be at risk for fiscal pressure as they continue to face dwindling tax bases and income levels. Moody’s has been making this assessment for a few years and now has acted on it by lowering credit ratings and forcing these small towns into even tougher fiscal decisions.

But some of that fiscal pain comes from the unintended actions of the Legislature and governor.