The 2011 Budget and Tax Levy

The 2011 budget and financial challenges facing our City are the most difficult I have experienced since taking office. By now, all property owners in Minneapolis should have received their notice for proposed property taxes for 2011. Many, if not all, have seen increases over 2010. These property taxes include taxes levied by Hennepin County, Minneapolis Public Schools, the City of Minneapolis and special taxing districts, such as Metro Transit and watershed districts. Understandably, I am most concerned with the City of Minneapolis’ portion.

The second of three public hearings on the tax levy and budget was held in November and we heard many concerns about the proposed levy and budget. The biggest concerns related to a cut in funding for the Affordable Housing Trust Fund (from $10 million to 8) and the dramatic increase in property taxes. The typical increase, based on the comments, calls and emails I have received, is between 15 – 18%. Several factors play roles in this, including:
1. The poor economy and the decline in the overall tax base
2. A shift in the burden of property taxes from commercial and industrial properties onto residential properties
3. Increased obligations to closed pension funds,
4. Decreases in Local Government Aid, and
5. The recertification of Tax Increment Financing Districts.

Please allow me to share more thoughts on each.

1. The poor economy accounts for a major portion of many homeowners’ property tax increases. The drop in value of both commercial and industrial property and the decline in residential property values due to foreclosure, short sales and the economic recession, have significantly reduced the property tax base. With a smaller tax base, even if the cumulative amount of the taxes being collected (the tax levy) remained constant, taxes per individual property would rise. Unfortunately, the poor economy does not reduce costs to the City – if anything, it increases them. More vacant homes and businesses mean a greater risk of fire, and more work for our inspectors and regulatory staff. Recessions tend to see increased crime rates, putting more pressure on police resources. Homelessness and unemployment make our employment, housing and economic development efforts more critical. More information on the connection between the economy and your property taxes is available here.

2. State law changes over the last decade have shifted the burden of property taxes from commercial, apartment building and industrial properties onto smaller residential properties. In 1997, residential property owners covered 33% percent of the total Minneapolis property taxes. Today they pay a 56%. This shift has caused residential property taxes to climb at a greater rate than taxes for other property types in the City.

3. The entire amount of money raised by the 6.5% proposed increase in the tax levy is proposed to go to meet our legal obligations to three closed pension funds. These contributions were “locked in” in the 1980s, when the City government agreed to pay pension amounts event when the investments of those pension funds could not. These programs are now closed, since they stopped accepting new members in 1978. The City has challenged overcharges in court and when the judge sided with the City we were able to decrease taxes by $10 million last year. Still, costs of covering the agreed to benefits to retirees and their survivors have grown dramatically in the last few years, and are projected to continue to grow in the years to come. Beginning in 2010 and for the next five years alone, market downturns have increased our responsibility to the funds by an estimated $38 million. For more look here .

4. Minneapolis’ Local Government Aid (LGA) has been cut by $54 million over the last three years. LGA was established by the State in the 1970s as a revenue sharing program to ensure that all communities in Minnesota have quality basic services within a taxing system which allows the state government to impose income and sales taxes and limits local governments to collecting property taxes and only limited state-approved sales taxes. Under this scheme, local governments agreed to send the income- and sales-tax revenues generated within their boundaries to the state with the understanding that some of this revenue would be redistributed to local governments through a need-based formula. Many cities in states that have had no such agreement (such as Colorado, New York, Oregon, Ohio, Kentucky, Michigan and Pennsylvania) have instituted city income taxes. Minneapolis does not currently have this option. Instead, we have worked to keep City spending at pace with inflation and essentially flat since the cuts began and had to raise the property tax levy to make up the difference. In 2003 State Aid accounted for 40 percent of General Fund revenue, while property taxes accounted for only 29 percent. In 2011, if recent projections prove accurate, State Aid will account for only 22 percent while property taxes will make up 44 percent of General Fund revenue.

5. Part of the pressure the budget this year is due to the recertification of about ½ of the old “NRP” Tax Increment Finance (TIF) districts that for the 20 years from 1989 – 2009 were used to pay for the Neighborhood Revitalization Program. Starting in 2011 these funds will be used to: a) make payments to Hennepin County for their share of the property taxes lost to the TIF; b) pay for the City and County costs of administering the district. The remaining funds (or the “Net Tax Increment” of about $10 million a year) will be divided evenly to pay debt service on the Target Center and the new neighborhood and community relations programs. This has taken roughly 15 million dollars out of total tax levy that was available for other purposes in 2010. Originally the Council approved twice as much funding for neighborhoods and Target Center debt but after the economic downturn and loss of LGA in 2008, this was cut in half. Unfortunately, selling Target Center is not a realistic option without a buyer, and while I would consider not paying down the debt as quickly as we could, this was a hard-fought Council decision, and paying down the debt quickly reduces the long-term burden on taxpayers and brings more money into the general fund sooner. In light of the ending of the 20 year long Neighborhood Revitalization Program and the end of the County’s financial contribution to it, City funding for neighborhood organizations is absolutely critical.

It is important to note that we are cutting the City budget even as property taxes are increasing. Adjusting for inflation, the City’s proposed budget for 2011 is 7% smaller than the City’s budget in 2001. The City will have close to 80 fewer full time employees in 2011 than 2010 and 400 fewer than it did in 2001. As we expect other departments in the City to reduce costs, one thing that is important to me is that the City Council Ward budgets themselves must share in those reductions. There is currently a proposal that would require the Council offices to do that by cutting each office budget by $5,400, through a combination of cuts to spending on things like office supplies, interns, mailings and travel as well as instituting a voluntary unpaid time off program. That proposal should be adopted.

There are other ongoing efforts to look at additional budget cuts in hopes that the levy and property taxes could be lowered. Each percentage point that we reduce the levy means a $2.2 million dollar loss of revenue. With a general fund budget of $390 million there may yet be places worth cutting, but more layoffs and lost services often have undesirable consequences. However, each percentage point that we reduce the levy will only yield a $16 annual reduction in property taxes for the “typical” Minneapolis homeowner. Yes, that’s only $16 for the whole year for a home valued at about $195,000. If the tax rate is 7.5% the total overall property tax on that home is about $3,159 and at 6.5% the total overall property tax would be is $3,143.

One option I would be willing to reluctantly consider would be to borrow to cover some or all of our pension obligations. Borrowing, however, also adds costs over the long term and the less money we have to spend on interest, the more we have to cover ongoing operating costs or real improvements to our infrastructure in the future. Also, as pension obligations are set to increase in the next three years, this option may be better reserved for future years, if at all.

I am hopeful that the actual impact on taxpayers may be slightly smaller than stated in the notices we received by mail this month. The notices were based on a maximum 7.5 % levy increase passed by the Board of Estimate and taxation. The budget proposed by the mayor and what each departments have planned for, is based on a 6.5% increase. The Board set a higher maximum to avoid greater cuts if the State’s economic forecast departs from previous estimates of what Minneapolis can expect from Local Government Aid.

This site answers many questions about the process and explains the City’s different funding sources. To view the complete proposed 2011 budget, go here

One more public hearing on the City’s proposed 2011 budget to give the public a chance to share their thoughts on the proposed budget and tax levy will be held on Monday, Dec. 13, 6:05 p.m. in City Hall, 350 South 5th Street, room 317. Written commends are also welcomed.

Whatever we do this year, I am convinced that the annual tax increases levied in the last few years are not sustainable. I will continue to work to make sure we are managing this difficult financial situation in a way that balances the need to keep taxes down with the need to avoid drastic cuts in critical services that would lead to more expensive long term consequences. There is a dire need for state tax and pension reform, which I will continue to push for while keeping my primary focus on making sure that City departments are investing our money wisely for the short and long term benefit of all our residents.