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8.5. SR 04-17-1995Item 8.5. ver MEMORANDUM TO: Mayor & City Council FROM: Pat Klaers, City Admi i r r DATE: April 17, 1995 SUBJECT: Legislative Update Attached for your review is a 4/10/951etter from State Senator Mark Ourada regarding the Senate legislative bill that calls for a local government tax freeze. Also attached is a League of Minnesota Cities article on this issue. I would like to spend a minute with the City Council to discuss the ramifications of this bill if it were to become law. Also attached is a recent League of Minnesota Cities article on the TIF bills being heard in the House and Senate. Likewise, I would like to briefly • update the council on the status of pending legislation relating to TIF. Both of these topics are anticipated to be agenda items for the next few meetings for further updates. • 13065 Orono Parkway • P.O. Box 490 • Elk River, MN 55330 • (612) 441-7420 • Fax: (612) 441-7425 ~aa ~ a tss~ ,• E • SENATOR MARK OURADA District 19 145 State Office Building St. Paul, Minnesota 55155 (612)296-5981 Home: 1110 Innsbrook Lane Buffalo, Minnesota 55313 (612)682-5024 Senate State of Minnesota April 10, 1995 Hank Duitsman Mayor, Elk River 13065 Orono Parkway, P.O. Box 490 Elk River, MN 55330-1900 Dear Ma~~~,~itsman, I would like to take this opportunity and update you and the members of the Elk River City Council on a controversial bill, SF 1570, that was recently debated on the Senate floor. This bill would prohibit increases in property taxes by units of local government during 1996, and would impose levy limits in 1997. I voted against this proposal. No legislation adopted in the past 15 years would create more havoc with the operation of local government than this legislation. New school construction is prohibited, and salary increases for staff would have to come at the expense of programs. Responses to natural disasters could not e made with any additional funds. In short, this type of heavy handed regulation could restrict the ability of local governments to function. This bill prohibits citizens from making decisions about the operation of their local units of government. Under the bill's provisions, the voters would be prohibited from authorizing an increase in property taxes to build new facilities or expand services. It prohibits elected representatives of the people from managing the affairs of the local units of government. This proposal represents a total distrust of local governments. Members of the Senate IR caucus and I agree that the funding system needs to be reformed. The current system is burdensome to the tax-payer, but a simple property tax freeze is not the answer. Creating a crisis is not an assurance that the system will be reformed. More likely, the freeze will result in a large tax increase in the future; be it on property, income, services or the sale of goods. As always, I am interested in hearing your ideas about what state government can do to make your job easier. If I can ever be of assistance to you, please contact me. Sincerely, ~/ ~ G~'~` MARK OURADA State Senator • COMMITTEES: Education and Higher Education Division • Family Services • Transportation a z ~, printed on recycled paper League of Minnesota Cities Cities Bulletin Number 14 ~~ Apri17, 1995 Senate puts property taxes on ice Gary Carlson One Senator described it as the dumb part of dumb and dumber. Another asked if cities would rather be hung or shot. One major daily newspa- per refetred to the proposal as non- sense. City officials recited a long list of negative consequences if the bill became law. Sut despite it all, the Senate passed S.F. 1570, Senate Majority Leader Roger Mce's bill that would put a hard freeze on property taxes throughout the state. The Senate approved the measure late Thursday morning, shortly before this issue of Cities Bulletin went to press. The bill would have the greatest impact on cities and counties. School levies would be frozen but schools would generally be held harmless because state aid would offset the levy reduction. The bill was amended to include a provision that would prohibit unfunded mandates during the freeze proposal. In addition, the HACA sunset was removed. The balance of the sunset including local government aid and the property tax classification is entirely sunset in 1998. We will provide full details on the amendments to the bill in next week's Cities Bulletin. in an increase in taxes paid by taxpay- ers, the state would provide an aid payment to the city to offset the levy increases. The bill would also impose strict levy limits on cities for taxes payable in 1997. These levy limits would restrict the overall growth in local government levies to the lesser of three percent or the implicit price deflator for The bill that went to the Senate floor would prohibit levy increases for taxes payable in 1996. The bill would also freeze market values for individual property owners unless improvements aze made or new structures are built. The combination of the levy freeze and the market value freeze means that the bills of taxpayers in 1996 would not :` increase. Tn fact, in growing communi- ties where substantial new construction is occurring, the tax bills of existing property owners could actually decrease. To assure that levies could not increase, the bill would severe) limit the issuance of new general obligation debt or any t i twat would increase the property tax levy. The bill presum- ab y woul~ect the issuance of special assessment supported debt or debt supported entirely by dedicated enterprise fund revenue, or any other debt that would not have a property tax impact in 1996. Any debt issued prior to Mamh 30 that would require additional 1996 levy would be permis- sible. If the levy increase would result For more information on the proposed property tax freeze, contact Senator Roger Moe at (612) 296-2577. See Freeze, page 8 Freeze, continued from page 1 government goods and services. • unlike the levy limits imposed during the 1970's and 1980's, this levy ]imit would apply to all cities. Cities could only exceed this limitation if the voters approve the excess increase. The bill would also receal many provisions of the school aid and local government aid system including LGA and HACA effective for 1998. The gislative Commission on Planning and Fiscal Policy would study the issue of property tax reform and make recommendations by January 1, 1997. After almost five hours of discus- sion and debate on Tuesday, the Senate Tax Committee approved the bill on a 12 to four party line vote. During the committee discussions, several amend- ments were added to clarify restrictions on the issuance of new debt These amendments allow new bond issues as long as the overall levy of the city would not increase. Senate Mce's litmus test for each amendment required that no amendment increase Those who voted for the property tax freeze Anderson Metzen Beckman R.D. Mce Berglin Mondale Bertram Morse Betzold Murphy Chattdler Novak Chmielewski Pappas Cohen piper Finn - Pogemiller Flynn 2'rice Hanson Ranum Hottinger Reichgott lunge Janezich Riveness DJ.lohnson Sams J.B. Johnson Samuelson Krentz Solon Kroening Stumpf Iangseth Vickemtan Lessard wiener property taxes for taxpayers in 1996. Other amendments included a provi- sion for the St. Paul school district to issue bonds to complete a high school and a provision restricting levy increases for unfunded police and fire .pension liabilities. The list of people testifying included numerous representatives of cities, schools, and counties. Mimtetonka Mayor Karen Anderson, Ely Mayor Frank Salerno, and League Executive Director Jim Miller testified on behalf of the League of Mincesota Cities in opposition to the bill. Mayor Karen Anderson told the committee that city levy increases from 1994 to 1995 were modest when compared to the levy decisions of other local units of government. Orr average, city levy increases for 1995 were slightly less than five percent statewide. Total levy for ail local government increases average 6.3 percent for the same period. Mayor Anderson also told the committee that nearly 30 percent, or 245 cities either froze their payable 19951evies or actually reduced them below the 1994 certified levels. Those who voted against the property tax freeze Belanger I.immer Berg Many Day Merriam Dille Neuville Frederickson Oliver D.E.Johnson Olson Johnston Ourada Kelly paziseau Kiscaden Roberson Kleis Runbeck Knutson Scheevel Kramer Spear Iaidig Stevens [,arson Terwilliger Lesewski Mayor Frank Salerno of Ely insisted that the loss of local control was a major city concern. He testified that state legislators must not trust or respect local officials if they are offering legislation such as the freeze. Mayor Salerno stated that the city councils and mayors may not be necessary if the legislature continues along this path. League Executive Director Jim Miller summarized a brief survey conducted by the League about the impact of the property tax freeze. According to responses from city officials, cities would have to cut services, delay infrastructure projects, and even forego state and federal grant money requiring a matching local contribution. Miller presented the survey results as an analysis of unintended consequences of the property tax freeze legislation. Al- though the committee seemed inter- ested in the presentations by the League of Minnesota Cities representa- tives, the bill was still ultimately passed. Other testifiers included Dan Elwood, City Manger of Spring Valley and President of the Minnesota Association of Small Cities, Tim Flaherty, lobbyist for the Coalition of Greater Minnesota Cities, and Richazd Fursman, City Administrator, Andover. % It's important to note that the property tax freeze is not yet law. It has simply been approved by the Senate. Will the bill become law? The property tax freeze proposal has tremendous political overtones. If ultimately vetoed by the govemor, he could be blamed by the DFL for all property tax increases in 2996. Ott the other hand, the balance of this Senate DFL budget proposal would restore the governor's proposed $77 million of aid reductions to cities and counties. If the govemor demands a restoration of his $220 million excess budget reserve, aid reductions could still occur. Hold onto your budgets for the next six weeks. [~6i ~:~ Page 8 LMC Cities Bulletin ~:.,,' ' r ~ s. ~Act><on Alert p~ (~ iS 1 r' 7w.rP cX ~r~ I i :H.~, mcma 1 ~j Tax-exempt status of bonds threatened Gary Carlson and Andrea Atherton On Mazch 15 Representative Ann Rest (DFL-New Hope) introduced H.F. 1380, a bill that would eliminate the state income tax exclusion for interest on bonds issued by the state and local governments in Minnesota. If enacted this bill would significantly increase local government borrowing costs because investors would no longer be able to exclude the interest income from their state taxable income. On behalf of cities across Minnesota, contact your representa- tive, senator, and the bill's authors income exclusion. According to public finance experts, the bill could increase bond interest rates by a quarter percent to three-quarters of a percent (25 to 75 basis points). Second, the bill would increase state income tax collections. According to the state's tax expenditure budget, state income tax collections could increase by approximately $50 million per year if all state and local bonds were affected. However, the income tax impact would be much less in the first yeaz df implementation because existing bands would only be impacted if they aze resold after July 1, 1995. Tax increment hearings continue C Gary Carlson Tuesday, March 21 was a busy day for those interested in tax increment financing. The Property Tax Division of the House Tax Committee completed testimony on H.F. 147, Representative Dennis Ozment's (IR-Rosemount) TIF reform bill. In addition, the committee considered H.F. 824, Representative Ann Rest's (DFL-New Hope) bill that would require school approval for new or modified tax increment districts. The committee also discussed Repre- sentative Ron Abrams's (IR- Minnetonka) bill requiring state auditor approval for tax increment districts. Many city officials have testified in opposition to provisions contained in H.F. 147. Although the testimony has been persuasive, the committee will likely include some, if nowt aii of the H.F. I47 provisions in the final House omnibus tax bill. Senate Developments On Tuesday afternoon, the Property Tax subcommittee of the Senate Tax Committee considered S.F. ~re~~°~s ly ~ I t~'~-. 1~ e, and voice your opposition to H,F. 1380. The bill was co-authored by Thomas Bakk (DFL-Cook), Edgar Olson (DFL-Fosston), Don Ostrom (DFL-St. Peter), and Jean Wagenius (DFL-Minneapolis). The bill would affect obligations issued or sold after July I,1995, or obligations acquired by a Minnesota taxpayer after July 1, 1995. The bill would have two major impacts. First, it would result in significantly higher borrowing costs for the state and local governments because investors would not realize the 1282, a bill authored by Senator John Hottinger (DFL-Mankato). The Hottinger bill would create a tax increment grant program and eliminate the LGA/HACA penalty for all tax increment districts. The Hottinger bill is a distinct departure from the legislation that has been working its way through the House. Instead of criticizing local officialsand their decisions, Senator Hottinger is deferring to theirjudge- ments. Senator Hottinger has been a constant suppotter of city issues throughout his tenure in the Minnesota Senate. In his testimony in support of his bill, Senator Hottinger outlined what he perceives to be problems wi[h tax increment financing. Under the current system of penalties, he has seen a continuous and growing stream of legislative exemptions from the LGA/ HACA penalty. This stream of legislation, he concludes, can only indicate that the system must be fixed. The tax increment grant program would allow the Department of Trade and Economic Development to make March 24, 1995 L the Cfi}ies $wL~et?r grants to TIF projects that might not be undertaken because of financial considerations. The grants would be available to cities that meet certain eligibility guidelines such as low family income, below average taxable tax capacity, high unemployment, and a demonstrated shortage of low to moderate income housing. Offering testimony and support were Bill Bassett from Mankato, Blaine Hill from Breckenridge, Rob Wolfington from Rushford, Steve Mielke from Hopkins, Matt Fulton. from New Brighton, and Mayor Kelly Ferber from Fergus Falls. Immediately after the discussions of the Hottinger bill, the committee began discussion of the Senate com- panion to the Representative Ozment bill. That bill was authored by Senator Gen Olson (IR-Minnetrista). The committee did not have time to fully consider the bill. While neither bill received a final vote, both will be laid over for further consideration by either the subcommit- tee or the full tax committee. ~ Page 3