The Free Press, Mankato, MN

Editorials

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

(Continued)

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.

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