5.3. SR 07-12-2010
Item # 5.3.
MEMORANDUM
Mayor and City Council
TO:
Lori Johnson, City Administrator
FROM:
July 12, 2010
DATE:
2011 Budget and Tax Levy Discussion
SUBJECT:
At the work session we will begin reviewing the 2011 tax levy and budget. As you know, the
Council must adopt a maximum tax levy prior to September 15. The budget will not be
adopted until December; thus, there is plenty of time to work through the details of the
budget before adoption. For that reason, most of the initial discussion on Monday will
center on the tax levy and other broad budget matters. As time permits we may begin
reviewing some of the smaller, less complex budgets such as the general government
budgets. The majority of the budgets will be discussed at meetings in August and
September. This will give the Council time to fully review the requests before adopting the
preliminary levy for certification to the County by September 15. Budget meetings have
been held with all of the department heads or division managers and the preliminary
requested budget has been compiled. It will undergo one more review before being
distributed to the Council. For that reason, no budget detail is included with this memo; it
will be distributed at Monday’s meeting or as soon as it has been thoroughly reviewed by
staff.
Proposed Timeline
The following is the proposed schedule for reviewing and approving the tax levy and budget:
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August 2 (depending upon length of regular agenda), August 9, and September 7 –
budget work sessions to discuss budget and tax levy.
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September 7 or 13 – approve proposed tax levy and set future meeting schedule for
budget discussions.
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November 8 – continue budget and tax levy discussion. Revised estimated NTC
data should be available by this time. Receive public input on budget.
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December 6 – present final proposed budget; take additional public input; adopt
final budget and tax levy.
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Tax Levy
Perhaps the most significant part of the budget process is determining how much the tax
levy will be. This in turn dictates the funding available to operate the general fund activities
of the City. Setting the levy amount is based on several factors including levy limits, required
debt and maintenance of effort levies, the tax revenue necessary to fund general fund
activities, changes in the net tax capacity (NTC), and the impact on taxpayers.
The 2010 levy and the 2011 levy distribution assuming no change in the total levy are shown
below:
2010 2011 Difference
General Fund $9,688,950 $9,755,913 $66,963
Library 58,850 65,700 6,850
Surface Water Management 50,000 50,000 -
City Special Assessments 16,427 17,767 1,340
Improvement Bonds 207,432 204,616 (2,816)
Certificates of Indebtedness 89,061 - (89,061)
Public Safety Lease Rev. Bond 606,341 591,142 (15,199)
Economic Development Tax Abatement 395,330 427,253 31,923
$11,112,391 $11,112,391 -
As you can see, an additional $66,963 of tax revenue is available in the general fund because
of decreases in some of the debt levies. The other item of note is that the levy for tax
abatements increases $31,923. Of course, the modest increase in the general fund tax
revenue doesn’t go far to cover the increased operating costs of providing the same services
that were provided in 2010.
Change in Net Tax Capacity
After a very long trend of increasing market values and NTC, the recent trend of decreasing
values may be stabilizing. Last year the taxable market value decreased five percent and the
NTC decreased 3.5 percent. It is too early in the year to get a firm estimate of the payable
2011 values from the County; although, I did speak with County staff to get a very rough
estimate. This estimate will change, nevertheless, it gives us some indication of what to
expect. A conservative estimate is that the NTC could decrease up to three percent. There
is a possibility that it may be less and the NTC will be relatively unchanged from last year. As
is the case each year, more accurate estimates will be available later in the year before the
final levy is adopted. The one thing we know for sure is that if the NTC decreases and the
tax levy stays the same, the tax rate will increase. In this atypical environment of decreasing
property values, using the tax rate as a measure of the real tax impact to a property is not the
best measure. The actual tax impact to each property will depend upon whether its value
decreased more or less than other properties or if it increased while most others decreased.
Proposed 2011 General Fund Budget Highlights and Discussion Items
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Pay and benefits: The proposed budget does not include any cost of living
adjustment (COLA). The last COLA employees received was 1.5 percent in January,
2009. Step increases are included in the budget. The cafeteria contribution includes
a five percent increase consistent with the 2010 increase. As you may be aware,
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legislation was passed this year that affects the required PERA contribution for
employees and the employer. This additional contribution will not increase the
pension benefits. The exact amount of the change varies depending upon the plan,
but in round numbers the employees will contribute .25 percent more causing a
reduction in their net pay. The employer contribution increases about the same
amount and that is included in the proposed budget. Finally, the Council directive
on no overtime pay and mandatory compensatory time is continued in the proposed
budget. If possible, overtime should be added back to the budget to provide the
staff hours needed.
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State Aid: The City is slated to receive a net of $465,742 in state aid in 2011;
$686,820 in LGA offset by a permanent reduction of $221,078 in MVHC. As we
have learned many times in the past, there is no guarantee that the State will fund
LGA or MVHC. Cities and counties are subject to having their aids taken away by
the State at the last possible minute. Since the payment of aids is questionable, there
are several ways to handle this revenue in the budget. First, the scheduled aid of
$465,742 could be included as a revenue source assuming the State’s budget forecast
will improve and the State will pay the aid. Second, the aid could be included in the
budget with a contingency plan if it is withheld or reduced by the State. Third, it
could be set aside to fund capital equipment or other items that are one time
expenditures or items that could be delayed if the aid is not received. Taking the first
approach is the most risky and could lead to a budget predicament for the City in
2011 if the aid is reduced or not paid.
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Transfers In: Transfers are made each year to the general fund from the waste water,
liquor, EDA, and HRA funds. The intent of the transfers is to cover the costs of the
services provided by administration, finance, human resource, and other staff paid
for by the general fund. The exception is the liquor fund transfer in that is
significantly higher as that transfer also helps offset other operating expenditures. It
is clear that the transfers in from waste water, the EDA, and the HRA do not cover
the actual costs of services provided. Therefore, it is recommended that these
transfers be increased for 2011.
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Level of Service: The requested budget is based on services continuing at current
levels. Of course, the caveat is that there are approximately 10 unfilled positions that
affect the level of service to some degree, but those positions have now been open
for more than two years in some cases thus the adjustment in level of service has
already occurred. It is increasingly difficult for current staff to maintain the levels of
service expected with the staff shortages and the lack of overtime in the budget.
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Estimated General Fund Revenues: There are several revenue sources that are
projected to decrease in 2011. Interest income and development related fees
represent the largest share of the decrease. Another change proposed is to increase
the amount of Municipal State Aid (MSA) that is allocated to maintenance. Since
there are no imminent plans for major City street construction, these funds would be
better used to maintain and preserve the infrastructure we already have. Finally, the
allocation of the transfer from the electric utility may be changed to increase the
amount in the general fund and decrease the amount going to the equipment
replacement fund since that is fully funded.
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Requested General Fund Expenditures: The requested 2011 expenditures are
approximately $330,000 higher than last year and that does not include overtime for
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staff other than public safety response, filling vacant positions or adding staff, or pay
increases. It does include capital outlay and an increase in the ice arena subsidy.
These requests will need to be reviewed and refined to bring the budget in balance.
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Use of Fund Balance: Use of the fund balance is again an option to balance the
budget in 2011. To date in 2010, expenditures are running below budget enough to
compensate for some unanticipated revenue shortfalls leaving funds available at year
end. Additionally, if funds are available in 2010, some of the capital equipment and
supplies for 2011 can be purchased out of the 2010 budget.
In conclusion, on Monday staff will be prepared to discuss the tax levy, NTC, and other
budget issues with the Council. As I mentioned earlier, if the proposed budget is ready, it
will be distributed at the meeting. Finally, I would like concurrence on the proposed budget
timeline as I would like to begin scheduling department heads and division managers for
upcoming budget meetings. If you have questions prior to the work session, feel free to
contact me.
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