The Free Press, Mankato, MN

December 20, 2013

More aid not cure-all for cities

Levies raised to ease cuts in some cities

By Jennifer Vogel
Minnesota Public Radio News

---- — The city of Grand Rapids is raising property taxes next year, despite receiving a bump in state aid of more than $300,000.

It's the kind of perceived double dip that has vexed Minnesota lawmakers and Gov. Mark Dayton, who expected state largesse would be reflected in lower city tax levies across the board.

But in the case of Grand Rapids, as with many other outstate cities, budget setters want to make up some ground lost during years of cutting and austerity. The Iron Range city is investing in streets, storm sewers and biking and hiking trails and wants to hire an additional police officer to reduce call response times. The police department went from 21 officers to 17 during the lean years, said City Administrator Tom Pagel. Now the city of nearly 11,000 residents is back up to 19, thanks to federal grant dollars.

"Can we get to 20 next year is the question," he said, noting that the way things are, officer sometimes have to respond to potentially dangerous calls alone. "Officers are saying they don't feel safe."

And yet there is that $307,000 increase in Local Government Aid, which theoretically at least should have more than covered the city's preliminary levy increase of just more than 2 percent.

"It's a struggle for legislators," Pagel said. "They go, 'We increased local government aid and we should see property tax relief.' And they did in a lot of cases."

But in most situations, they didn't.

More than 500 cities in Minnesota set preliminary levies that are above what they were last year. Just over 200 cities said they would hold taxes steady and only 93 planned to lower their levies.

Every city has a different story. In the case of Grand Rapids, an unexpected expense got in the way. The city is being required to pay more into an Iron Range fiscal disparities program, which creates a shared tax base within a multi-county taconite relief area. Grand Rapids' added pay-in is almost equal to the bump it's receiving in state aid, Pagel said.

The fact is, fixing city budgets isn't as simple as plugging state dollars in, even $80 million worth, the total increase in the LGA program next year. It's easy to make that assumption though, given that cuts to the program over the last decade have coincided with property tax increases across the state. The state threw cities another bone last legislative session. Starting in January, many city purchases will be exempt from the state sale tax, potentially saving cities millions of dollars. (See related story below.) But that helping hand, too, has turned out to be more complicated than first thought.

Cities are contending with increases in health care costs, public pension contributions and also one-time expenses. Marshall, for example, found after a study that it has to raise employee wages to comply with pay-equity laws. Many others are merely trying to dig out from under years of budget cuts and infrastructure postponements. More than one city is looking to beef up a depleted reserve fund meant to pay the bills during fiscal rough patches.

"Since the Great Recession, many cities have delayed infrastructure and other capital projects, instituted pay freezes and in some cases hiring freezes and with the slow-but-steady economic recovery, they are beginning to catch up on some of these deferred activities," said Gary Carlson, intergovernmental relations director for the League of Minnesota Cities. "Also, some cities delayed hiring additional public safety personnel and now are finding that simply extending hours for existing staff is not sustainable and can expose a department to staffing challenges should they experience a key retirement or two."

"Nobody wants to raise taxes," Carlson said. "It's not a goal. They are doing this for important community reasons. Keep in mind that LGA will total $508 million in 2014, an $80 million improvement over 2013 but still well below the program's 2002 high-water mark of $565 million."

Mankato is raising its levy, while expecting to pass savings on to individual taxpayers, said City Manager Pat Hentges. Despite a $589,000 bump in LGA next year, the city set a preliminary levy increase of 2.3 percent or $330,000. The council reduced that to 1.3 percent when it approved the final budget Dec. 2.

"Our tax base has been robust since the recovery," Hentges said. So the increase is "actually a reduction in taxes." Hentges said a home worth $165,000 would see a savings of about $35.

But if things are going well, why raise the levy at all?

All but $5,000 of the levy increase, which was aimed at economic development, is to pay off debt for previously approved public facilities, Hentges said. "All the general increase is related to debt service."

Additional state aid dollars will be eaten up by wage and health care cost increases and rising fuel and energy prices.

Brainerd is proposed a levy increase of 12.6 percent or $500,000, significant compared to other cities, especially given that it will also receive an additional $382,000 in LGA next year. City Administrator Theresa Goble said the levy increase will go largely toward payments on existing bonds, rebuilding the city's reserve fund and for new equipment debt. "We have gone about seven years without purchasing new equipment other than squad cars," she said. "We need ... a street sweeper, a couple of City Hall staff cars, a pickup for the inspections department and a pickup for the parks department."

Brainerd is facing a set of unique circumstances that make budget cutting difficult right now. Goble said her city is contending with the loss of $150,000 in annual utility revenue because of the recent closing of the local Wausau Paper mill. The city also saw the expiration of a fire department grant and increases in liability insurance and health care and pension costs.

With the economy improving, however slowly, new apartment buildings and commercial structures are popping up in some cities, expanding local tax bases and lightening the levy load for everybody else. That's made it possible for cities to raise their levies — fixed dollar amounts that are spread among properties according to value and other factors— in some cases without placing a heavier burden on individual payers. This dynamic has largely kept taxpayers from lighting torches and storming city halls during the end-of-the-year tax and budget discussions.

In Red Wing improvements to the nearby Xcel Energy plant mean the company will pay a greater share of local property taxes. The city, where LGA remains flat aside from a one-time million dollar payout for storm damage incurred last spring, is able to increase its levy by 3 percent or $425,000 without raising taxes on most home and business owners, largely thanks to Xcel's increased valuation.

The city plans to beef up its reserve fund and focus on long-delayed capital projects, like storm sewer and road improvements and new roofs on public buildings.

Besides LGA increases, the new state sales and use tax exemption for many purchases made by cities and counties is also expected to ease budgets next year. The question is by how much. Last legislative session, lawmakers broadened the reach of an existing exemption, which already applied to townships. But so far, new rules have proved vague and complex, making it hard for cities to calculate the magnitude of savings they can count on come Jan. 1. That has created reluctance to trim levies accordingly.

"One of the things that is a big question mark is the value of that sales tax exemption," said the League of Minnesota Cities' Carlson. He said the state estimated that cities and counties would save about $130 million annually, but "the state may have overestimated."

Carlson's organization compiled information from counties and cities with populations of more than 500 and found the savings may be more like $54 million. "That's an estimate," he said. "But the state's is an estimate, too. We have talked to the Department of Revenue about the methodology in preparing that estimate. We're trying to reach an agreement on what is the number. Unlike with LGA, where you know there is $80 million more going out, this is unknown."

The effect is hard to measure because of some of the law's fine points. The exemption doesn't extend to purchases made by many joint entities, even though government bodies everywhere are joining forces to create efficiencies. It also doesn't include purchases "used to provide services that are generally provided by a private business," such as liquor for a municipal liquor store or supplies for a campground. The goal is to keep municipalities from wielding a financial advantage over private enterprises, but the language makes it hard to know what's exempt and what's not.

"Cities are saying they are wary of budgeting for the savings when they are seeing all these rules and regulations," Carlson said. "It's requiring quite a bit of accounting work. If you have a small community center you maybe rent for a wedding, that is considered a good or service usually provided by a private business, so it's not exempt. You have to figure out how to apportion the sales tax you would normally pay on electricity." That's an imposing task for a city with a tiny staff. "The small cities are saying we are worried about whether we can realize the savings from the exemption."

Carlson said, "That could be why some of these small cities are saying, do we want to risk an audit? Maybe it's easier to just pay the sales tax."

Minnesota Public Radio News can be heard in Mankato on 90.5 FM or at MPRnews.org.