Despite bump in state aid, cities raise levies to dig out from past cuts

The city of Grand Rapids, on the Iron Range, 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.

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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. It 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 in Grand Rapids 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 (LGA), which theoretically at least should have more than covered the city’s preliminary levy increase of 3.8 percent or $217,590. The city council will vote on the final levy tonight and Pagel expects a smaller increase of just over 2 percent. “It’s a struggle for legislators,” said Pagel. “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. (Minneapolis will lower its levy and St. Paul will hold its flat.) Cities have until the end of December to hold public hearings and vote on their final numbers—many are voting tonight. “To think that by simply increasing LGA, we’re going to be able to reduce property taxes is a pretty big stretch,” Pagel said.

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, said Pagel. “We’re basically signing the back of the check and giving it to the iron range fiscal disparities pool,” he noted with a bitter chuckle.

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. 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, in southwest Minnesota, 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 made during the recession. 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.”

The city of Brainerd is proposing 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 7 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.” She said crumbling city hall steps will have to wait.

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. “That basically took up all the additional LGA we are allocated to get,” Goble said.

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, in southeast Minnesota, 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. “We are capturing the extra money from Xcel and investing it,” said the city’s administrator Kay Kuhlmann.

Mankato also is raising its levy, while expecting to pass savings on to individual taxpayers, according to 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 final council vote will take place tonight and Hentges expects the increase to be lower, around 1.8 percent. “Our tax base has been robust since the recovery,” he 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 the increase is attributed to debt for street improvements,” Hentges said. “All the general increase is related to debt service.” He said additional state aid dollars will be eaten up by wage and health care cost increases and rising fuel and energy prices.

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 January 1st. 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 over 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 impact 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 and save money. 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.”

The city of St. Cloud expects to save close to a half million dollars because of the sales tax exemption, but that’s just an estimate and city administrator Michael Williams said his staff is parsing how the law affects programs like the municipal golf course and ice arena. He calls the new exemption “absolutely a good thing,” but also supports efforts to clarify certain provisions next legislative session. “Anything that clarifies it is going to be helpful,” he said. “Most of what we do, we do it because there is a public purpose. Arguably, we think most everything should be exempt. Nobody else is going to build a convention center or ice arena.”

Despite the expected savings, and a bump in LGA of $1.6 million in 2014, the St. Cloud city council voted to raise next year’s tax levy by 2.4 percent or $504,000.  Williams said additional LGA will go toward rising health care costs, staff pay increases, police squad cars and “things we had held off on.” As for the levy, “The increase is really due to the fact we had a voter approved referendum last November (2012) to incur $18 million in debt to put on streets and roads,” after years of deferring some of those expenses. “This is the beginning of that.”

Even considering rising costs, uncertainty about the sales tax exemption, and the deferred infrastructure projects of years past, some cities in Minnesota are choosing to hold their levies flat or even decreasing them a little. It’s not easy to do.

Fergus Falls is an odd animal, since its state aid will remain effectively flat in 2014—it received a 1.7 percent increase—and yet it has managed to avoid raising the levy. City Administrator Mark Sievert said the city will weather increasing health insurance premiums and even give employees a wage bump after “years where we did zero and one percent.” That’s because the city was able to stop paying the county $125,000 for emergency dispatch services, saw a decrease in its debt service payments and expects to save tens of thousands more through the sales tax exemption.

Sievert noted that last year, Fergus Falls raised its levy, making him reluctant to pass judgment on cities that are doing the same for 2014. “You can be critical and say, you got an increase (in LGA), you shouldn’t raise your taxes. But cities are so different. They are not increasing their travel budgets out there. When smaller communities go out and do a big project once in a blue moon, they tear up the whole town. They take a big hit at one time and their taxes go up.”

“If legislators would go back to their own districts and say, why is your levy going up, they would find that it’s not just big raises,” he said. “It’s that we have things we have to do.”

The city of Little Falls stands out because it is actually lowering its levy for 2014, by 3.88 percent or $130,000.  The cut will be offset by a $350,000 increase in state aid. “The increase in LGA did it, it’s as simple as that,” said Lori Kasella, the city’s finance officer. “It’s still a tight budget,” she said. “Our LGA in 2014 is still (roughly) equal to what it was in 2009. Since 2009, we have had some staff reductions through attrition.” The city also has put off road projects, buying new equipment, and fixing leaking roofs. “We’ve done without some things.”

Little Falls will use surplus LGA to address some, but not all, of those issues, Kasella said. But it’s more important to give taxpayers a break next year than to fill the remaining gaps in government services and infrastructure. “It wouldn’t be a good thing to not decrease the levy with the LGA increase,” she said, noting that Little Falls raised its levy last year.

“Taxpayers have had to make up the shortage, with cuts in LGA,” Kasella said. Lowering next year’s levy “seemed like the responsible thing to do. We have to live within our means, too.”

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