3.4. SR 04-09-2001** Item 3.4.**
MEMORANDUM
TO:
Mayor and City Council
FROM:
Lori Johnson, Finance Director
DATE: April 9, 2001
SUBJECT: Personal Property Tax Legislation
Sherburne County is requesting that the City Council adopt the attached resolution in support
of the legislation reducing the class rate on personal property for generation equipment and
replacing the same with trust funds. The city f~rst became involved with this issue in 1997 as
the result of efforts by power companies to lobby the legislature for property tax relief. In
response to discussion about proposed property tax reductions for electric generation
facilities, the Coalition of Utility Counties and the Coalition of Utility Cities were formed.
Sherburne County has played a major role in the Coalition of Utility Counties' efforts to
protect the tax base that comes from generation facilities; a sizable part of the county's tax
base comes from generation facilities and reductions in the taxable value of these facilities
would greatly impact the county's tax rate. The City of Elk River's tax rate would not change
significantly if reductions were made because less than three percent of the tax base comes
from generation facilities. In 1997 the City Council chose to become active with the Coalition
of Utility Counties because of our close relationship with Sherburne County. Over time we
have become less active as this has been a time consuming and complicated issue. We feel
that Sherburne County has represented the city's interests well. The coalitions have been
working hard to make the best of this legislation by protecting the host cities and counties to
the greatest extent possible.
Attached is additional information from Sherburne County regarding this issue. Obviously,
this is of great importance to the city, not so much because of the change this may have in the
city's tax rate, but because of the significant change it may have in the county's tax rate.
Typically, when the Council considers adopting the tax levy, it looks at not only the city's tax
rate, but also the total tax rate including the county and school.
Action requested:
The City Council is asked to consider the attached resolution in support of the legislation
reducing the class rate on personal property for generation equipment and replacing the same
with trust funds.
March 21, 2001
BOARD OF
COMMISSIONERS
13880 High,z/ay 10
Elk River, MN 55330-4601
(763) 241-2700 ~ 1-800-433-5229
(763) 241-2707 Fax ~w~'th,,~ M/n~:~sota,~
Website: www. co.sherburne, mn. us
Mayor Stephanie Klinzing
City of Elk River
PO Box 490
Elk River, MN 55330
Dear City of Elk River Council Members:
As most of you are aware, the County of Sherburne has been in a five plus year
struggle to ensure that the personal property taxes on the generation machinery in
Sherburne County either remain protected or, in the alternative, that a fiscal mechanism
is put in place that will mitigate or nullify any adverse impacts to the County, its
townships and its cities (as well as any other taxing districts). We believe that we have
now arrived at a legislative proposal that will maintain approximately one-third of the
county's tax stream as well as protect the cities of Becker, Elk River and St. Cloud
which has an income stream that is derived from personal property taxes on generation
equipment. Please note that this will not impact any transmission and distribution lines,
nor effect any pipelines located within our county. Please note that the issue involving
the school districts is deemed a work in progress as XCEL is working with the school
board association to minimize any impact.
I have enclosed for you the following for your consideration:
· A copy of the proposed legislation;
· A bullet sheet highlighting the terms of the legislation
· A history of the issue that was put together by our Assistant Sherburne County
Attorney Kathleen A. Heaney
· An issue sheet from the same author; and,
· A sheet identifying the tax base that is effected by the personal property taxes in
Sherburne County as well as other host communities.
This legislation is being introduced this week. Clearly, if the County of Sherburne loses
its tax base, then it will make it more difficult for the remainder of our cities and
townships to raise taxes. Therefore, we seek your assistance. We would ask that you
enter into a resolution of support of the proposed legislation and send a copy of that
District 1
ARNE ENGSTROM
20800 Meadowvale Road
Elk River, MN 55330
(763) 441-3869
District 2
TERRY NA GORSKI
21683 - 186th Street
Big Lake, MN 55309
(763) 263-3032
District 3
RAY FRIEDL
7398 - 89th Avenue
Clear Lake, MN 55319
(320) 743-2824
District 4
BETSY WERGiN
13920 County Road 42
Princeton. MN 55371
(763) 389-3843
District 5
RACHEL LEONARD
27655- 1!£th Street
Zimmerman. MN 55398
(753) $56~2.497
resolution to Mr. Brian Bensen for distribution to our local legislators. If you feel further
explanation is necessary or would like to have a Commissioner/staff person made
available to discuss this matter before your City Council, we will be happy to do so.
Your consideration of this matter is greatly appreciated and we look forward for your
support in this matter.
Cordially,
Betsy Wergin
Chair, Sherburne County Board of Commissioners
Objective: To neutralize the impact of the loss of the
personal property tax base and keep the host
communities fiscally sound
· Reduce the class rate from 3.5% to.85% for personal
property the is generation equipment only
· To retain the EMV on the tax roll for the purpose of
preserving the bond rating for the host communities
Have the commissioner of Finance issue bonds to
establish a "trust fund." Bonds are repaid by the
IOUs thorough surcharge in lieu of taxes
· The "trust fund" is held by the host communities if
greater than $1 million; if less than $1million then
the communities enter into a joint powers
agreement to administer
· The trust fund shall be audited
· The fund balance is based calculated on a principal
amount (using 200'1 income stream) which invested
at a 6% rate will replace the income loss from the
75% reduction in class rate
· The fund is created to include the interest "gap"
· Upon 2nd year of retirement of the facility or part
thereof, the trust monies shall be returned to the
state for distribution ('1/3 to the site and '1/3 to units)
· No "dipping" into the principal; no commingling
· If nameplate increases efficiency, then option to have
a siting agreement in lieu of the .85% of the class rate
New facilities have the option of being exempt if enter
into a siting agreement with the host communities;
leaves the Koch exemption unaffected
· Schools to be worked out with the school districts by
XCEL
· Fiscal disparities- no net impact anticipated
Need to tie the units and sites with value and the host
communities for retirement purposes
Action to be taken:
Request that the County Board pass a motion to approve
the terms of the proposal for introduction into the
legislators and ask that a letter be sent to request support
of our local legislators of the bill (example provided)
Send a letter to Mr. Carlson of MICA; Mr. Weirens of
AMC and letters to Goodhue County Board (on behalf of
Jeff Cole and Brad Johnson); Becker City Council (on
behalf of Joe Rudberg) and Red Wing City Council (on
behalf of Jeff Hallberg) with our deepest appreciation of
all their assistance and good work on the proposal
(examples provided)
3. Assign Commissioners to contact our local
representatives and senators asking for their support
COALITON OF UTILITY COUNTIES HISTORICAL PROSPECTIVE
Historically, all commercial and industrial property in the State of
Minnesota had personal property taxes on its machinery. When that was
eliminated back in the 1970's, the State chose not to eliminate the personal
property taxes on the electrical industry and the pipeline industry. Part of the
rationale (which makes the most sense) is that they looked at the cost for
removing the personal property taxes on these facilities and determined that the
burden to the State would be too great and therefore, as regulated industries,
they chose not to eliminate those.
In 1978 the Public Utilities Regulatory Act was enacted. Congress
subsequently enacted the Energy Policy Act of 1992. These two acts opened
generation for a portion of the industry to competition by requiring that utilities
that needed capacity needed to entertain bids from alternative suppliers.
In 1994, Northern State Power Company informed Goodhue County that
they intended to seek tax reductions through a number of methods. Several
years later, NSP had instituted a property tax appeal wherein they sought
exemption of a significant amount of the personal property taxes. The City,
County and Subsequently, the school district had entered into an agreement for
resolution of the same. Within six months, NSP had asked that legislation be
introduced at the State eliminating the PPT on generation machinery.
In 1996, the Federal Energy Regulatory Commission ("FERC") issued
Order 888 and 889. These orders opened the wholesale electrical market for
power by providing that all transmission line owners offer transmission or
"wheeling" to any electrical utility and to any retail customer taking transmission
services as part of a state mandated direct access program. Further, on "retail
wheeling" a direct access program required utilities to open their lines to any
customer.
In 1996 the Department of Revenue, Commissioner of Public Service and
Public Utility Commission began a study on the impact of taxation on utilities. On
January 15, 1997, this proposal was then presented to Senator Pappas'
Committee. In the executive summary, it identifies:
"Minnesota imposes higher property taxes on utility companies than
neighboring states...Much of the higher property tax in Minnesota is
attributable to the high class rate imposed on utility property and the
personal property assessment on utility machinery, a tax not imposed on
other Minnesota business property."
The conclusion that is drawn:
"Based on the analysis, the amount of taxes paid in Minnesota and other
states in the region and the competitive consequences of such taxes in
light of the possibility of future deregulation, policymakers may want to
consider changes to the current tax policy on the taxation of utilities." Id.
at page 23.
It also identifies that due to the personal property tax, Minnesota businesses
have the largest tax burden in the region, thus imposing a competitive
disadvantage on utility systems and new generation assets. Id.
In the same report, it references what's known as the Koch Refinery
legislation. The Minnesota Legislature exempted personal property tax and
machinery tax so L.S. Power could build a 250-megawatt co-generation facility in
Cottage Grove. What the report fails to mention is that the co-generation facility
had to reach certain efficiencies in order to obtain this waiver of the taxes. This
exemption is available to all utilities that attain these same efficiencies. This
legislative report was instituted because of the Koch Refinery bill.
In 1996, at the same time that the Department of Revenue was involved
with the study referred to above, it had also proposed a rule change governing
the valuation of assessment of personal property of electric, gas distribution and
pipeline companies under Minnesota Rule Chapter 8100. In an order issued on
July 10, 1996, (attached as Exhibit B) Administrative Law Judge Richard C.
Lewis identified that the rules as proposed by the Minnesota Department of
Revenue be adopted. The rules subsequently were. It should be noted that the
underlying genesis for the rule change was based on a letter from Bob Dolan, an
NSP tax lobbyist, requesting change. The rule change was implemented in
1997. Historically speaking, the Department of Revenue had weighed balance
between the cost approach for valuation of property and the income approach.
Historically, these two approaches generally provided a consistent outcome. The
cost approach was traditionally weighted at 85% and the income approach was
weighted at 15%. The "mere threat of deregulation" led to the rule change. The
Department of Revenue requested a shift in the weighting of the factors so that
the cost approach would be reduced to 75% of the weight and the income
approach would be increased to 25%. It also modified how the income factor
was calculated for the utilities. In the past, they had simply averaged the rate of
growth over the past three years of the utility. The rule change, however,
identified that there needed to be an extrapolation into the future and thereby
changed the formula. It was suggested as testimony by Alan Whipple from the
Minnesota Department of Revenue that the rule change would result in a 3%
decrease in the value of the personal property for the electric and gas distribution
throughout the State of Minnesota. This has been true. For example, in
Sherburne County, they have experienced anywhere between 3% to 6%
decrease in the personal property value on a yearly basis since the
implementation of the rule.
In 1997, the Coalition of Utility Counties was then formed. This was a
voluntary organization where counties which have generation facilities as well as
transmission and distribution facilities located within their boundaries have come
together for the primary purpose to ensure stability of their tax base and protect
the economic viability of the community as a whole. Subsequently, the Cities
who are hosts to generation facilities formulated the Coalition of Utility Cities. We
have worked in conjunction with these folks since then. The Coalition
representative in Sherburne County has been the Mayor for the elected officials
and the City Administrator Joe Rudberg for staff.
Subsequent to the DOR rule change and the FERC Order 888-889, the
State of Minnesota, obviously changed its classification rate for commercial and
industrial properties. The classification rate went from 4.5 down to 4.0 down to
3.5. This has resulted in as of yet unseen shift in the tax burden to agricultural
land as well as residential homes. The impact is unseen given the fact the State
has a surplus and has been able to utilize that surplus to give a credit particularly
to homeowners. However, as a surplus is cyclical in nature, the elimination of
the credit will create a significant onus on our citizens. This onus will be
compounded if the personal property tax were eliminated/decreased.
The Counties have been involved in the attempt for resolution of this issue. The
Counties, in their talks with the IOUs had agreed that any relief to the utilities
should have a trigger mechanism, to-wit; the relief was only for the time when
consumers had choices as to which their provider would be. This was premised
on the IOUs initial complaint that they were at a competitive disadvantage in a
deregulated market.
The IOUs have shifted twice in their plea to the legislator. The second argument
that they use for request for relief on PPT is that they are not on an even playing
field with other IOUs in other states and that they should not be taxed differently
than other industrial and commercial properties. This year, they have added a
new wrinkle. With the onset of rolling brown downs in California and the attention
paid to the need for added generation and transmission and distribution (T & D),
they now identify that they are not able to site because of the PPT and the long
drawn out process for the siting. (Presently it takes 8-10 years to site and build a
facility.) I have no reason to disagree with the latter statement. However, this
issue begs then the question: What is the incentive f~t communities to have
more facilities in their back yard if the revenue strear~Cne?
Please note that utilities are valued differently ~at other industrial and
commercial (C & I) properties: The Department of Revenue (DE)R) values the
businesses based on their nexus to the state. The exception to this rule is the
land that underlies the properties. The Department uses the FFRC (Federal
Energy and Regulatory .Commission) reports to allocate that portion of the
business that lies within the State of Minnesota. They then apply the unit value
rule to the personal property (the value of the unit as a whole as opposed to the
individual component parts.) In what this writer believes is then an inconsistency,
the DOR then subtracts from the entity the pollution control exemption. (The
definition of the unit value rule flies in the face of then deducting an individual
piece of the entity.) This value is then allocated to the respective host
communities. Once that is done, the local assessor places a value on the books
for the lands. This is then the estimated market value of the property.
As a regulated industry, any property taxes are made part of the rate base that is
approved by the Public Utilities Commission (PUC). The taxes are then "folded
into" the rates that are charged the electrical consumer. One of the biggest
concerns that some legislators have had is what they perceive as local host
communities taking advantage of the "golden goose" and having higher than
average tax spending per capita than elsewhere in the state. Please note
Sherburne County has never been incorporated into this mix to this writer's
knowledge. Their concern is that this lavish spending that they perceive is being
passed along to other rate base payors without discretion. The second
consternation that some legislators feel has to do with the annexation process of
some power plants that have occurred after the siting of the same. For instance,
the Red Wing Nuclear Power plant was sited 6 miles out from the city limits. The
City then annexed the plant. The same annexation occurred with the Becker
(Sherco) power plant. At the time of annexation, the property tax rates in the
respective townships were lower than the city spending levels. The spending
levels of some host communities and the annexation efforts are two issues that
have to be dealt with when addressing the legislators.
What the legislators fail to hear is the following:
· There are inherent disadvantages in hosting power plants.
For example, the
City of Becker has snirt (smog, snow and dirt) that they have to content with
in the winter. The Sherco power plant is the biggest belcher of air pollutants
in the state of Minnesota. The City of Red Wing gets to deal with the "glow
Factor" from the nuclear plants; the County of Sherburne has hundreds of
trains per year that run on the tracks. The more train traffic, the higher the
incidents of car/train crashes. All host communities have negative impacts
with the facilities. Power plants are not considered green industry.
That there are significant tax exemptions that the power plants already enjoy.
The pollution control exemption, DOE credits, decreasing valuation because
of DOR rule changes, an excelerated depreciation schedules, capitalization
rates that are not market derived, etc.
If the host communities are not given any tax stream from the utilities, then
what incentive is there to site additional capacity or new facilities given the
negative consequences of the facilities?
The DOR came out with the study recommendation in January 2001 that was
recently presented before the House tax Committee. The recommendations are
to have the taxes for schools are funded by the state thereby providing utilities
with a 42% reduction in property taxes. They further recommend that all new
facilities be given exemptions from property taxes. The IOUs are not satisfied
with this however and shall be pushing for additional tax relief.
RESOLUTION 01-
A RESOLUTION FOR THE CITY OF ELK RIVER
A RESOLUTION IN SUPPORT OF THE LEGISLATION REDUCING THE CLASS RATE
ON PERSONAL PROPERTY FOR GENERATION EQUIPMENT AND REPLACING
THE SAME WITH "TRUST FUNDS"
WHEREAS the City of Elk River is in Sherburne County; and
WHEREAS the County of Sherburne has a significant portion of it's tax base consisting
of personal property taxes; and
WHEREAS
the elimination of the same without a
elimination of the same over a ten year
consequences to the County; and
replacement income stream or
period would have dire adverse
WHEREAS
the Cities of Elk River, St. Cloud and Becker also have personal property
taxes as part of their income stream and elimination of the same would cause
adverse consequences to the citizens of Sherburne County; and
NOW, THEREFORE, BE IT RESOLVED by the City Council for the City of Elk
River, Minnesota that we support the concept of the reduction of the class rate of personal
property taxes for generation equipment on the condition that a trust fund is created which
replaces the income stream and continues to maintain the estimated market value on the tax
rolls for future bonding capabilities. We would respectfully request that as our area
representative/senator, that you vote in favor of the same and attest to the same as it comes
before the legislature.
Passed and adopted this ~ day of
Stephanie Kflinzing, Mayor
ATTEST:
Sandra A. Peine, City Clerk
Dated: