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5.5. SR 03-24-2003MEMORANDUM Item 5.5. TO: FROM: DATE: SUBJECT: Mayor and City Council Pat Klaers, City Ad,,~ ~o~, · March 24, 2003 ~'y Legislative Session and City Budget Update Attached for your information is the Funding Street Construclion and Maintenance in Minnesota Cities booklet that was put together jointly by the League of Minnesota Cities (LMC), the City Engineer's Association of Minnesota, and the Minnesota Chapter of the American Public Works Association. This document recommends funding options for street improvements. The LMC has requested that the City Council consider adopting a resolution that supports the findings. Also attached is a memo from the LMC Executive Director Jim Miller regarding this document plus two brief articles from the LMC Cities Bulletin. ! understand that legislation has been introduced that reflects the Report's recommendations relating to funding options for non-MSA city streets. !t is recommended that the City Council adopt the attached resolution, which supports the findings in this Report. There is not much new to report to the City Council regarding proposed or pending bills that would impact Elk River. Attached for your information is some recent legislative updates as provided by LMC. A bill (which has been anticipated) has been introduced regarding wine in grocery stores... There has been no progress made in modifying the Governor's budget proposal...Also, the levy limit proposal by the Governor is generating a lot of discussion... It also appears that the property tax freeze is going to the Senate floor for a hearing... As previously discussed with the City Council, most of the decisions by the legislature are not expected to be made until sometime in May. Assuming that the budget cuts as proposed by the Governor (or something similar) are approved, then the city needs to be prepared to adjust the adopted 2003 budget. I am scheduling meetings with the finance director and all the department heads (individually) in April. Following these meetings a list of recommendations and a list of other options to consider will be presented to the City Council. In the meantime staff is trying to be as conservative as reasonable in making municipal expenditures that are within the budget. As always, Council feedback and input on priorities is appreciated. S~ Coundl/ Pat/ Updates/ Ltgislative Recommendation It is recommended that the City Council adopt Resolution 03-__ a resolution supporting legislation to provide improved funding options for city street improvements. SI Coundl/ Pat/ Updates/ Legislative RESOLUTION 03-_ A RESOLUTION FOR THE CITY OF ELK RIVER A RESOLUTION SUPPORTING LEGISLATION TO PROVIDE IMPROVED FUNDING OPTIONS FOR CITY STREET IMPROVEMENTS WHEREAS Minnesota contains over 135,000 miles of roadway, and over 19,000 miles--or 14 percent--are owned and maintained by Minnesota's 853 cities; and WHEREAS city streets are a separate but integral piece of the network of roads supporting movement of people and goods; and WHEREAS existing funding mechanisms, such as Municipal State Aid (MSA), property taxes, special assessments and bonding, have limited applications, leaving cities under- equipped to address growing needs; and WHEREAS maintenance costs increase as road systems age, and no city--large or small--is spending enough on roadway capital improvements to maintain a 50-year lifecycle; and WHEREAS the Council of the City of Elk River finds it is difficult to develop adequate funding systems to support the City's needed street improvement and maintenance programs while complying with existing State statutes; and WHEREAS the League of Minnesota Cities, the Minnesota Public Works Association, and the City Engineers Association of Minnesota, have jointly sponsored the development of a report entitled Funding Street Construction and Maintenance in Minnesota's Cities wherein (I) the street systems of the cities within the State are inventoried; (2) the existing funding systems are detailed and evaluated; and (3) recommendations are made; and WHEREAS cities need flexible policies and greater resources in order to meet growing demands for street improvements and maintenance. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Elk River, Minnesota: That this Council concurs with the findings of the above referenced report, and fully supports the recommendations contained in that report; and BE IT FURTHER RESOLVED by the City Council of the City of Elk River, Minnesota: That this Council supports the adoption of legislation that would provide cities with the policy options they need to address current and future challenges in providing adequate street improvement and maintenance programs. S/Admin/Resol/Unapproved/LegislationStreetllmprovrnents Passed and adopted this 24 day of March, 2003. ATTEST: Stephanie A. Klinzing, Mayor Sandra A. Peine, City Clerk S/Admin/Resol/Unapproved/LegislationStreetllmprovments 145 University Avenue West, St. Paul, MN 55103-2044 Phone: (651) 281-1200 · (800) 925-1122 TDD (651) 281-1290 LMC Fax: (651) 281-1299 · LMCIT Fax: (651) 281-1298 Web Site: http://www.lmnc.org January 23, 2003 MEMORANDUM TO: Member City Mayors Member City Administrators and Managers FROM: Jim Miller, Executive Director SUBJECT: Funding Street Construction and Maintenance in Minnesota's Cities Report Today the League of Minnesota Cities (LMC), in parmership with the City Engineers Association of Minnesota and the Minnesota Public Works Association, is releasing the attached report on municipal street funding. The Funding Street Construction and Maintenance in Minnesota's Cities report was produced by the Transportation Policy Institute, a non-profit research and educational organization. The report outlines existing funding mechanisms and their limitations, and goes on to describe deficiencies on the municipal state aid (MSA) and non- MSA city street systems. It also provides several policy recommendations that could lead to improved municipal street conditions. The purpose of the report is twofold. First, it is meant to be a tool for city officials looking at street funding options. Second, the report's recommendations will be used to demonstrate to legislators that cities need flexible policies and greater resources in order to meet growing demands for street improvements. We hope you will take the time to look over the report and to help put the findings into context for your legislators. Also attached is a draft resolution for consideration by your city council. If your council adopts the resolution, please forward copies to Anne Finn at the League and to your legislators. Each member of the sponsoring organizations will receive one hard copy of the report by mail, and every legislator will receive a copy of the report at the Capitol today. The Funding Street Construction and Maintenance in Minnesota's Cities report and draft resolution are also available on-line at www.lmnc.org. If you have questions or comments about the report, please contact LMC Intergovernmental Relations Representative Anne Finn at (651) 281-1263 or e-mail afinn~lmnc.org. Enclosures AN EQUAL OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYER Cities show support for improved street funding options Resolutions adopted by 74 cities Anne Finn Earlier this year, the League of Minnesota Cities (LMC), the City Engineers Association of Minnesota, and the Minnesota Chapter of the American PuNic Works Association released the Funding Street Construction and Maintenance in Minnesota's Cities Report. The report describes challenges relating to maintenance, safety, conges- tion, highway access, and all-season carrying capacity. Keport recommen- dations pertain to funding mechanisms for the municipal state aid (MSA) and non-MSA city street Systems. Last month, the report's author, Matt Shands, accompamed by member city representatives, presented the report to the House Transportation Finance Committee and the Senate Transportation Policy and Budget Division. Testimony focused on the need at the local level for flexible funding tools that would allow city officials to preserve infrastructure investments while remaining account- able to local taxpayers. The need for improved mechanisms, according to the report, is greatest on the non-MSA city street system. The report's recommendations seek, among other initiatives, local authority to establish street utility billing, greater flexibility to generate revenues through special assessments, and authorization to establish impact fees. The report was distributed to all League members and was accompanied by a sample resolution supporting the report's recommendations. To date, 74 cities have adopted the resolution and have provided copies to their legislators. League intergovernmental relations staffis in the process of seeking authors for legislation that would accomplish the report's recommenda- tions pertaining to the non-MSA system, and key legislative committee chairs have agreed to give hearings to bills originating from the report. If your council wishes to consider a resolution supporting the report's findings and recommendations, visit the Legislative section of the LMC web site to download the Funding Street ConstrUction and Maintenance in Minnesota's Cities report and a sample resolution at: http://www, lmnc. org/ advocacy/ streetstudy, cfm. Your help is critical to this legislative effort. Please review the report and make your legislators aware of its applicability to your city. If your council adopts a resolution supporting the recommendations, please forward copies to your legislators and to Anne Finn, LMC, at afinn~lmnc.org. ~- COMING TO A CITY NEAR YOU -- HR training sessions for city supervisors Training your city's supervisors on the basics of human resources ensures smooth operations and helps protect your city from employment-related claims. Choose the session closest to you: · Crookston--May 12 · Two Harbors--July 17 For more information on these sessions or for information on HR training, please visit the League's web site at www. lmnc.org or contact Jill DeVriend, HR & Benefits Assistant, at (651) 215-4064 or jdevriend@lmnc.org. March5,2003 j__ ilq C_ t2 ,4,e lle t'i Page9 THE 15-Minute dvocate READ · CONSIDER · TAKE ACTION Transportation bill needs your support 1. Get informed Bills that would allow cities to impose fees for street maintenance, upgrades, and reconstruction projects were introduced in the Minnesota Senate and the House last week. HF 965, and its Senate companion SF 825, would allow city councils to charge a transportation utility fee for: · Reconstruction, including paving, grading, curbs and gutters, bridge repair, overlays, drainage, base work, subgrade corrections, and boulevard maintenance; · Facility upgrades including traffic signals, turn lanes, medians, street approaches, alleys, rights-of-way, sidewalks, retaining walls, fence installation, and additional traffic lanes; · Maintenance work including center-line striping, seal coating, crack sealing, sidewalk maintenance, signal maintenance, street light maintenance, and signage. The proposals would allow a fee to be assessed by a two-thirds vote of the city council. It also would require a public hearing on any resolution related to a transportation fee. No fees could be charged unless a city also has prepared and adopted a master plan that, among other things, includes the proposed funding sources for all projects in the plan. Any fees charged and collected under this proposal would be dedicated to the specific projects listed in the master plan. Cities would not be allowed to gather any fees that exceed the estimated costs for projects. The proposals, both of which have been referred to committees, also include guidelines for the manner in which fees can be calculated and an appeals process for property owners. 2. Take action Please call your legislators to voice your support for this legislation, and explain the positive impact it could have on your community. Legislative directories and contact information can be found on the Legislature's web site at: www. leg.state.mn.us. Questions and comments can be directed to Anne Finn, LMC, at afinn~lmnc.org, or call (651) 281-1263. 3. Stay involved This piece of legislation is based upon a recommendation from the Funding Street Construction and Maintenance in Minnesota's Cities Report, sponsored by the League of Minnesota Cities in conjunction with the City Engineers Association and the Public Works Association. To download and read the report, please visit the Legislative section of the LMC web site at: www. lmnc.org. Follow this piece of legislation by visiting the Minnesota Legislature web site at: www. leg.state.mn.us. The 15-Minute Advocate, through information and action by member dties and League staff, is designed to increase understanding among legislators, media, and residents about the impacts of public policy on Minnesota's residents and the dties in which they live. Cities Bulle Number 11 March 19, 2003 Concerns about impact of governor's levy limit plan, Senate freeze for capital projects Gary Carlson, Tom Grundhoefer, and Eric Willette As reported in last week's Cities Bulletin, the governor's levy limit proposal and the Senate property tax freeze have raised significant questions from cities across the state about the impact on issuing debt. The governor's proposal would not directly restrict the ability of cities to issue new debt, but instead would limit the ability of cities to increase the property tax levy to service some forms of debt. The Senate property tax freeze would prohibit a city from issuing almost any new debt if the debt would increase the city's debt service levy for taxes payable in 2004 or 2005. Under past levy limit laws, cities were able to claim "special levy" status for property tax levies needed to support bonded indebtedness as well as principal and interest on most forms of certificates of indebtedness. "Special levies" related to debt service were traditionally outside levy limits to preserve the ability of cities to secure the credit advantage offered by the city's full faith and credit. In addition, in recent years levy limits have been placed only on cities over 2,500 population. Both the governor's and the Senate's proposals would affect all 853 cities. The governor's plan Under the governor's proposal, cities would generally be allowed to maintain special levy authority for existing debt. In addition, cities would be granted special levy authority for new debt for which the city has entered a binding contract or has received voter approval prior to May 1, 2003. The governor's proposal seems to allow the issuance of debt after May 1, 2003, ifa binding contract or agreement is in place before May 1, 2003. Special levy authority is also granted for new debt that under existing law requires voter approval and is spread against referendum market value rather than tax capacity. Generally, this includes only general obligation bonds that are supported solely through property taxes. Finally, cities maintain the special levy authority for most certificates of indebtedness, other than certain tax or aid anticipation certificates and certificates issued to fund current expenses or to pay the cost of extraor- dinary expenditures that result from public emergency. Other than the items listed above, the governor's plan would not provide a city with additional authority to levy for any new debt that requires an increase in property taxes in 2004. Apparently, a city could cover debt service within the city's levy limit. But given the deep cuts in state aids, most if not all cities would have a difficult time fitting a new debt service levy within the extremely tight levy limits proposed by the governor. For example, under current law, improvement bonds paid at least 20 percent through special assessments with the balance paid through property taxes would not req,uire voter approval. If this type of bond is issued and no binding contract to spend the proceeds is entered into by the city prior to May 1, 2003, then no special levy authority would be granted to pay the new debt service levy in 2004. The only exception might be that a city could ask voters for general authority to exceed its levy limit by a specific dollar amount at a special or general election on or before the November general election. This option may be difficult to use in some circumstances because cities will not be notified of their levy limit by the Dept. of 1Zevenue until Sept. 1. Some cities may be reluctant to ask for, and some citizens may be reluctant to approve, authority to exceed an unspecified levy limit. In 2005 and beyond, cities would not be covered by levy limits and, therefore, could increase their levy to pay for new debt or other needs. Any increase in the levy, however, could be rejected by the voters after the final levy is certified in December through a reverse referendum procedure. If voters successfully challenge a levy increase, the city's property tax levy would be limited to the previous year level; therefore, any additional debt levy required by the city would have Continued on page 3 Continued from page 1 to come from the existing property tax levy. The Senate plan The Senate property tax freeze is perhaps best understood as an attempt to limit local government property tax levies to the 2003 level for the next two years. To achieve that freeze, the bill would generally prohibit the issuance of new debt, including installment purchases and lease purchase contracts after March 31, 2003, if the obligations would require a new levy first coming due for taxes payable in 2004 or 2005. There is some confusion surround- ing the March 31 effective date. The original bill contained a May 31 date and the tax committee adopted an amendment that changed the date to March 31. However, the amendments reported to the Senate floor did not contain the date change. We under- stand that the author will officially make the date change to March 31 in the rules committee or on the Senate floor. An exception in the bill would allow the issuance of new debt if the city's total debt service levy for 2004 and 2005 does not increase above the 2003 amount. This situation would most likely occur where an existing obligation is retired in 2003, which would have otherwise reduced the city's debt levy in 2004.Two other exceptions also apply: refunding bonds, which would presumably reduce debt service costs, would be permissible; and, obligations that a municipality finds will not require any additional levy in 2004 or 2005 (i.e., those funded through non-property tax sources, such as pure revenue bonds). The bill would create a set of transition rules that would allow bonds sold pursuant to an agreement with a purchaser or an underwriter entered into before April 1,2003. In addition, bonds sold by a municipality to finance projects required to be funded by the federal government or state government, and bonds to fund a contract with a builder or supplier entered into before April 1,2003, would be permissible. Unlike the governor's proposal, the Senate plan does not seem to allow even voter approved new debt. Issues rai~ed by the pmpo.~ls Cities and public finance professionals have raised concerns about the impact of these proposals on pending projects, particularly those planned to fund upcoming improvement projects. City officials have complained that these proposals would disrupt projects that have been in their city's long-range planning for years. Capital projects often take several years to get through planning, design, open bidding, signing contracts, and selling bonds. Many projects that are partially through this process could be delayed or cancelled. For developing communities, these proposals would make it very difficult to bond for new infrastructure. At least one large, fast-growing city is contemplating a moratorium on new development in response to these proposals. If this phenomenon is widespread, it will create a severe impact on the availability of new housing and on the construction industry, and could push development into neighboring states or township areas (which are not covered by the governor's proposal). For older communities, redevelop- ment projects could similarly be jeopardized if cities are restricted in their ability to issue debt or raise debt levies. In addition, many older cities are in the midst of 20 or 30 year plans to replace all their streets. Each year they sell bonds to pay for that year's street replacements. Even though the amount of debt they service each year does not change, the governor's proposal would not grant levy authority for many of these projects for 2004. City officials and public finance professionals are also concerned with the governor's proposal for a reverse referendum procedure after 2004. Under the procedure, cities could not be assured that they would be able to increase their levy to pay debt service on bonds issued during the year until the following January. This uncertainty would not only be challenging for city budgeting purposes, it would also likely increase the perceived risk to the bonds, decreasing their credit rating. Cities should be cautious about changing their behavior due to one proposal or the other. For example, if a city looks merely at the governor's proposal and decides to enter into a binding contract for an upcoming project prior to the May 1,2003 deadline, the city and its taxpayers are then more exposed if the Senate's plan is adopted. Under that scenario, the city could be obliged to pay the cost of the contract with no ability to issue bonds, and, therefore, would be required to fund the entire cost of the project upfront with other existing revenue sources. Both the governor's and Senate's proposals would result in delay and cancellation of many necessary capital projects at a time of historically low interest rates. This would disrupt long- range plans and increase costs to taxpayers. It would also have major impacts on the construction, engineer- ing, and architectural sectors of our economy at a time when there is already a dearth of construction activity. The uncertainty these proposals introduce into the bond market will also likely drive up costs of borrowing to local governments. The League will be communicat- ing our concerns to the governor and legislative leaders in meetings scheduled this week. ~ March 19, 2003 Page 3 Administration proposes transportation funding package Anne Finn Saying the administration intends to deliver a transportation system that allows Minnesotans to travel safer, more efficiently and with less conges- tion, Gov. Tim Pawlenty and Lt. Gov./ Transportation Commissioner Carol Molnau last Friday proposed a $1 billion transportation financing package that would accelerate the construction of critical, but long-delayed, state highway and bridge projects. Under the plan, projects will be advanced up to nine years to the 2004-2009 construction seasons. The package includes up to $550 million from new state trunk highway bonds to leverage the accelerated use of $550 million in future federal high- way funds. The Minnesota Dept. of Transportation (Mn/DOT) recently identified $42 million in budget reductions that will be reallocated to pay the debt service on the bonds. The amount falls short of his $2 billion campaign promise, but is consistent with the governor's pledge to avoid tax increases. The package was scaled back in the face of the $4.2 billion deficit. Additional highlights of the financing package include investing $50 million toward metro area transit improvements (such as enhanced shoulder lanes, park-and-ride lots, and ramp meter bypasses) and allocating $5 million for greater Minnesota transit service. The plan's critics are calling it insufficient and short-term. It will not address the chronic funding shortage that has led to the deferred mainte- nance, congestion, and safety prob- lems-all of which have compounded in recent years. Further, the plan does not provide assistance to local units of government in financing their share of the acceler- ated construction program. Lt. Gov./ Commissioner Molnau says the administration will explore local transportation funding options prior to the 2004 legislative session. For a look at the detailed plan, visit the Mn/DOT web site at: www. dot.state.mn.us/financing. ~- THE , 15-Minute dvocate IREAD · CONSIDER · TAKEACTION Transportation bill needs your support Call your legislators to voice your support for this legislation, and explain the positive impact it could have on your community. See page 5for details. City transportation utility fee bill introduced Anne Finn At the request of the League of Minnesota Cities, Sen. Ann Rest (DFL-New Hope) last week introduced a bill that would give cities the authority to impose fees for street maintenance and reconstruction purposes. The House companion was introduced Monday by Rep. Mike Beard (R-Shakopee). SF 825/HF 965 would allow cities to use trip genera- tion data to establish a transportation utility fee program for street recon- struction, maintenance, and facility upgrades such as traffic signals and turn lanes. The bill would implement one of the recommendations of the recently released Funding Street Construction and Maintenance in Minnesota's Cities Report, sponsored by the League, the City Engineers Association, and the Public Works Association. It would provide cities with a much-needed, additional tool for meeting street maintenance revenue needs. Co-sponsors of the Senate bill are Senators Bill Belanger (R-Blooming- ton), Keith Langseth (DFL-Glyndon), Sharon Marko (DFL-Cottage Grove), and Mike McGinn (R-Eagan). House co-sponsors are Representatives Morrie Lanning (R-Moorhead), Bernie Lieder (DFL-Crookston), and Paul Thissen (DFL-Minneapolis). We will need your vocal support to move this bill forward (please see this week's 15-Minute Advocate on page 5). To review the bill, enter the bill number into the "Bill Information" search tool on the Minnesota Senate web site at: www. senate.leg.state. mn.us/~- March 19, 2003 Page 7 Wine in grocery stores bill airs at Capitol Jennifer O'Rourke The wine in grocery stores legislation was officially introduced in the Legislature on Monday as SF 914 and HF 938. The chief author of the Senate bill is Sen. Linda Scheid (DFL-Brooklyn Park); Senate co-authors of the bill are Senators Steve Kelley (DFL-Hopkins), Cal Larson (P~-Fergus Falls), Scott Dibble (DFL-Minneapolis), and Bob Kieflin (P~-Winona). The chief author of the House bill is t~ep. Barb Sykora (R-Excelsior); House co-authors are Representatives Erik Paulsen (P~-Eden Prairie), Phyllis Kahn (DFL-Minne- apolis),JeffJohnson (R-Plymouth), and Michael Beard (P~-Shakopee). On the Senate side, the bill has been referred to the Commerce & Regulated Industries Committee and has been promised a hearing before the first deadline of April 4. The House bill has been referred to the Regulated Industries Committee, which is a change from other years when the bill had gone through the Commerce Committee. As introduced, the bill would require cities to issue an off-sale wine license to a supermarket located within the city if the supermarket applies and meets certain criteria. Essentially, the supermarket would have to demomtrate it has established and implemented a training program for employees on the sale of wine and has a theft prevention program in place. The city would have to conduct at least one unannounced youth access compli- ance check per year. The bill further states that the fee cities charge for a license may not exceed the amount reasonably necessary to recover costs associated with issuing licenses and inspecting supermarkets. It's hard to know if this is the year the wine in grocery stores bill will become law. A few years ago, the bill was introduced as a metro-only bill. Proponents of the bill have been very aggressive in their public campaign efforts over the past few years to gain consumer support. For example, they have placed fliers in grocery stores touting the convenience of being able to pick up a bottle of wine at the same place one would purchase dinner items. The bill was defeated last legislative session in the House Commerce Committee. Capitol insiders do not remember the Senate ever taking votes on this piece of legislation. The League and member cities have discussed the wine in grocery stores issue during LMC policy committee meetings. Last summer, the Minnesota Grocers Association presented its perspective on the issue with members of the LMC Improving Service Delivery Policy Committee. In addition, the League has formally addressed the issue in its youth access to tobacco and alcohol policy, which "opposes any proposal that could result in increased risks of youth access to alcohol and tobacco products and expanded venues for the sale of such products." To stay current on issues related to HF 938/SF 914, participate in the LMC wine-in-grocery stores listserv. To sign up, visit the LMC Listservs page of the LMC web site at: www. lmnc. org/forms/listserv, cfm. Listserv membership is limited to city officials and city staff. ~ Senate passes development fee report exemption Laura Offerdahl A bill that would change the current April 1 reporting deadline for munici- pal construction and development- related fees, and exempt municipalities that collect less than $5,000 of these fees each year, passed the Senate State and Local Government Committee on Monday. The bill, SF 726 (Sams, DFL-Staples), passed unanimously and was referred to the Consent Calendar for action by the full Senate. Many small cities and towns have little development occurring in their communities, and, as a result, collect few development-related fees. If this bill passes both bodies and is signed by the governor prior to April 1,2003, cities that collect less than $5,000 of these fees would not be required to file a report this year or in future years. Cities that collect more than $5,000 per year in construction and develop- ment fees would have until June 30 each year to file their reports with the Building Codes and Standards Division in the Dept. of Administration. The House Local Government and Metropolitan Affairs Committee is scheduled to hear the companion bill on Tuesday at 2:30 p.m. in Room 200 of the State Office Building. For information on HF 744/ SF 726, visit the legislative bill tracker on the Minnesota Legislature's web site at: http://www, leg. state.mn. us/leg/legis.asp. If you have questions about the legislation, please contact Laura Offerdahl, LMC, at (651) 281-1260 or lofferdahl~lmnc.org. ~ March 19, 2003 Page 9 14 2883 16:88:19 Via Fax -> ?G34417425 fl&ninistrator Page 881 Of 804 Could the governor's proposal become law? -FridayFax- A weekly legislative update from the League of Minnesota Citi~ ~: ~ ~,. advocate at the capitol to identify an alternative recipient of a larger budget cm--one group rejoices while another cries foul. The legislative process to develop and adopt a state budget usually involves give and take between the governor and legislature, the House and the Senate, Demoera£s and Republicans and hundreds of other interests. Although the governor has a tremendous impact off the process due to the constitutional requirement that he propose a complete biennial state budget, in the end, a compromise is always reached which reflects, to a degree, the concerns and needs of all interested parties. Could Ibis year be different? We have heard rumblings around the capitol that the House and even the Senate might decide to adopt the governor:s proposal and go home. Why would legislators roll over and accept the governor's plan lock, stock and barrel? With a $4.2 billion state budget deficit and state tax increases apparently off-the-table, there is just no way to easily pare this amount from the budget and not make one group or another unhappy. Yesterday morning, one long-time Republican legislator mentioned in a private conversation, "This just isn't any fun when you don't have any resources." Some legislators might want to enact the governor's plan in hopes of having him be the focal point for all of the criticism. There might be another rationale behind this strategy. Some legislators have privately indicated that they are amazed at the lack of public reaction lo the governor's plan and that perhaps the legislature should give the public what it wants--lower taxes and less government--with the hope that as the impacts are borne out, individual citizens will then comprehend the government services that benefit them and give clearer signals of their preferences for government services. This year more than ever, the budget process is a zero-sum game. Modifying the governor's budget proposal without new resources forces every On the other hand, if legislators do not work to smooth lhe rough edges of the governor's plan, they certainly could be criticized for abdicating their responsibility in the legislative process. Few legislators will want to go home facing irate constituents without the defense of an attempt to moderate.the governor's plan. Clearly the governor's plan places a heavy burden of budget cuts on cities and the additional burden of extremely tight levy limits on future property taxes. Could it get better? Maybe. Could it get worse? Without a doubt. The aid reductions in the governor's plan and the tight levy limits proposed by the governor and the Senate property tax freeze are very real proposals. Contact your legislator now and let them know how severely the local government levy limits and aid cuts will impact your community. Not only an aid cut but a delay? As mentioned in this week's Cities Bulletin, the tax sections of the governor's budget proposal include a provision that would authorize the Commissioner of Finance to delay the payment of up to 15 percent of any appropriation to a city or a county for up to 60 days after the start of its next fiscal year. For example, up to 15 percent of the July, October or December 2003 LGA or market value homestead credit payments could be delayed until March 1 of 2004. As we mentioned in the Bulletin article, this power would most likely be used in order to help the state lo meet its cash flow needs. This morning, we discussed this provision with Finance Commissioner Dan McElroy and although he could not definitively state whether he would need to exercise the delay power, he did state that the state's cash flow situation is "razor thin." Clearly, For more informalion on oily legislative issues, conlacl any member of Ihe League of Minnesola C/lies Inlergovernmenlal Relalions learn. 651.281.1200 or 800.925.1122 X~r 14 Z883 1G:81:88 Vi~ F~x -> 76344174Z5 ~&~inistrator Page 88Z 0£ 884 · -FrldayFax- A weekly legislative update from the League of Minnesota Citi~ any further downturn in the state's economy could increase the chance that aid cuts as well as payment delays could occur. When coupled with the deep aid reductions and levy limits in the governor's budget, such a delay almost certainly creates severe cash flow problems for cities. Senate Property Tax Freeze heads to the floor The Senate bill that would impose a two-year hard freeze on city and county property tax levies and tight restrictions on the ability to issue new debt was moved to the floor after a brief stop in a Senate Rules Subcommittee. During the tax committee debate on the bill, Senator Julianne Ortman (R- Chanhassen) challenged the motion to refer the bill to the Senate floor. She raised concerns about the effect of the bill on school districts, cities and counties and she felt the bill should be considered by the Education Committee as well as the State and Local Government Operations Committee. Her challenge was not upheld and the bill will now officially go to the Senate floor. League staff is working on a variety of other issues of importance to cities. While much attention at the legislature is focused on the '04-'05 budget, committees are taking action on numerous bills that impact cities. Here is a sampling of the issues in which the League is actively engaged: Open Meeting Law: SF 3:16 (Marry), which would have required cities to pay the cost of administrative law judge proceedings to resolve complaints, has been substantially modified to simply provide that the Department of Administration may issue nonbinding advisory opinions on March 14, 2003 Page 2 which city officials will be able to rely in case of future litigation alleging violation of Chapter 13D. Representative Don Borrell (Dist. 19B-Waverly), who is the author of the companion bill, HF 564, has agreed to consider changes incorporated in SF 316 as amended that the League, the MN School Boards Association and Minnesota Association of Townships support. Elections: HF 67 (Kahn), which would require that all city council members elected by ward be elected to new terms at the first regular city election after wards are redrawn, is now on General Orders on the House floor. In its current form, the bill now only applies to cities of the first class that do not have staggered terms for such council positions where the change in the population of any redistricted ward is 5 percent or more. The League has expressed concern that cities should continue to exercise authority to determine the terms and schedule of election for city council member ward positions. Current state election law also requires cities to wait to re-establish ward boundaries until after the legislature is redistricted. Some legislators have voiced concern that the bill does not sufficiently address the need to re-establish ward representation immediately after redistricting and may try to amend the bill on the House floor to make its provisions apply broadly to all cities with wards. Housing: HF 706 (Severson) will be heard next Tuesday in the House Local Government & Metropolitan Affairs Committee to clarify that language added in the '02 session does not alter existing local authority to regulate subdivision development. (Chapter 315 provides that the city and a builder may negotiate a development agreement that provides for a mix of housing in which some units are affordable to lower income households.) For mote information on oily legislalive issues, contacl any member of Ihe League of Minnesota C[lies Inletgovetnmenlal Relalion$ team. 651.281.1200 or 800.925.1122 tlar 14 Z003 16:01:51 Via Fax -> ?63441?425 fldministrator Page fl03 0£ 004 - Frid ay Fax - A weekly legislative update from the League of Minnesota Citi~ Data Practices: SF 317 (Marry), which would have required cities [o participate and pay the costs of extensive administrative law hearings to resolve data practices complaints, has been successfully altered to provide only that in determining the award of reasonable attorney fees, the court shall consider whether the responsible authority (for a city or other government entity) that is a defendant in an action under Chapter 13 is the subject of a written opinion and did not act in conformity with that opinion. SF 316 is now before the Senate Judiciary Committee. Representative Borrell is the author of the House companion (HF 565), which has not yet been heard in committee. Transportation: SF 825 (Rest, Belanger, Langseth, Marko, McGinn), introduced this past week, would give cities authority to impose fees for street maintenance and reconstruction and allow use of trip generation data to establish the program, which could also help meet the costs for upgrades to traffic facilities such as signals and turn lanes. Representative Beard (Dist. 35A-Shakopee) will author the companion bill in the House. Wine in grocery stores: S.F. 914 (Scheid, Kelley, Larson, Dibble, Kierlin) would require cities to issue an off-sale wine license to a supermarket located within the city. Word is a hearing will occur in the Senate before the first deadline of 4/4/03. The issue will go before the members of the Senate Commerce & Utilities committee. The House bill will be introduced soon and through Regulated Industries. Sales of tobacco to minors: HF 561 (Gerlach) sets up an administrative penalty structure at the state level to deal with businesses who sell tobacco products to minors. Once this bill went into effect, it For March 14~ 2003 Page 3 would take away a city's authority to impose harsher penalties to violators. The bill also requires sellers of tobacco to use electronic age verification equipment to check a buyer's identification. Local Impact Notes: HF 624 (Seifert) requires the commissioner of finance to prepare a local government fiscal impact note on an agency rule, if a governing body of a city, township, county, school district or sanitary district makes a request by a resolution. The House Governmental Operations & Veterans Affairs Policy committee amended the bill to prohibit rules from taking effect until approved by law if the cost of complying with proposed rules for a person or entity is more than $10,000 per year. Current law allows the chair or ranking minority member of a tax committee to request a local fiscal impact note on a bill or agency rules. Various organizations representing local units of government are supporting this bill as a way to identify the costs of implementation before administrative rules are adopted. On Wednesday, the House Governmental Operations & Veterans Affairs Policy committee passed an amended version of HF 624 and re-referred the bill to the State Government Finance committee. The Senate has not yet introduced a companion bill. ° Municipal bid protest attorney fees: SF 414 (Bakk) authorizes the courts to award attorney fees, in addition to the costs of preparing an unsuccessful bid, to unsuccessful bidders in actions challenging the validity of municipal contracts under the uniform municipal contracting law. The Associated General Contractors of Minnesota is advancing this change in law to help defray the cost of protesting a municipal contract when an unsuccessful bidder believes that a municipality has more informalion on ,-ily legi$1alive issues, conlacl any member of Ihe League of Minne$ola Cilie$ laler~ovcrnmenlal Relalion$ learn. 651,281,1200 or 800,925,1122 Hat Z4 2883 1G:BZ:3Z Via Fax -> 76344174Z5 fl&ministrato~ Page 884 0£ 884 - Frid ay Fax - A weekly legislative update from the League of Minnesota Cities violated the law. The League is concerned that this bill will encourage more lawsuits against municipalities when an unsuccessful bidder disagrees with a municipality over the responsibility of the bidder to fulfill the contract. On Monday, the Senate State and Local Government committee discussed SF 414 and laid the bill over for further discussion and possible revision. The bill may be up again in this committee on Wednesday, March 19~h. The House companion, HF 444 (Swenson), is scheduled for a hearing in the Local Government and Metropolitan Affairs committee on Tuesday, March 18~h at 2:30 p.m. in room 200 of the State Office Building. LMC and the Minnesota Schools Boards Association are attempting to amend the bill to apply only when a municipality has intentionally violated the law, and to allow the court to award attorney fees to a prevailing municipality. The League needs your vocal support in making the cities' case at the legislature. Legislators want to hear from you. To review the bills, go to www.le~;.state, mn.us/le~4'le~is/a~.n TUESDAY, MARCH 18 March 14, 2003 Page 4 Senate Transportation Policy and Budget Division Chair: Sen. Dean E. Johnson 11 a.m., Austin Public Library Agenda: Public hearing with various local officials, business representatives and citizens testifying. House Commerce and Economic Development Chair: Rep. Greg Davids 12:30 p.m., 10 State Office Building Agenda H.F. 561 (Gerlach) creates state uniform mandatory penalties for tobacco sales to minors and requires electronic age verification by stores. This bill takes away a city's ability to impose harsher penalties. House Transportation Policy Chair: Rep. Ron Erhardt 12:30 p.m., 200 State Office Building Agenda: Presentation on long-range planning for rural transportation. WEDNESDAY, MARCH 19 Hearings of interest MONDAY, MARCH 17 Senate Crime Prevention and Public Safety Committee Chair: Sen. Leo Foley 12:30 p.m., Room 15 Capitol Agenda: Testimony only on S.F. 222-Pariseau: Pistol permits issuance provisions modifications. S.F. 369-Murphy: Pistol permits issuance provisions modifications. No action will be taken on either bill this meeting. Senate Crime Prevention and Public Safety Committee Chair: Sen. Leo Foley 12:30 p.m. Room 15 Capitol Agenda: S.F. 222-Pariseau: Pistol permits issuance provisions modifications. S.F. 369-Murphy: Pistol permits issuance provisions modifications. Action will be taken on the bills. House Local Government and Metropolitan Affairs Committee Chair: Rep. Jerry Dempsey 2:30 p.m., Room, 200 State Office Building Agenda: H.F. 706 (Severson) municipal ordinance authority clarified relating to affordable housing. For mote inforrnalion on oily legislalive issues, conlac! any rnernbet of Ihe League of Minnesola Cities Inletgovemmenlal Relalions learn. 651.281.1200 or 800.925.1122 Funding Street Construction and Maintenance in Minnesota's Cities Providing the tools to help cities preserve their road and bridge capital assets January 2003 Sponsored by: City Engineers Association of Minnesota The Minnesota Chapter of the American Public Works Association League of Minnesota Cities ~,'11NNE~OTA CHAPTER APWA League of Minnesota Cities Cities promoting excellence © Copyright Transportation Policy Institute, 2002 Acknowledgements The creation of this report has been guided by a group of representatives of Minnesota cities and professional organizations concerned with municipal transportation infrastructure. These organizations, the City Engineers Association of Minnesota (CEAM), the Minnesota Chapter of the American Public Works Association (MPWA), and the League of Minnesota Cities (LMC) were represented by a Project Steering Committee whose participation in the preparation of this report was invaluable. Team members include: Tom Eggum Sy Knapp Brian Bachmeier Bob Brown Anne Finn Pat Murphy Mike Rardin Steering Committee Chairman, former Director of Public Works/City Engineer, City of Saint Paul, and Chair, MPWA Public Policy Committee Steering Committee Co-Chairman; LMC Ambassador and former Director of Public Works, City of Brooklyn Center Director of Public Works/City Engineer, City of Oakdale MN/DOT Metro District State Aid Engineer League of Minnesota Cities (LMC), Office of Intergovernmental Relations Former MN/DOT State Aid Engineer Director of Public Works, City of Saint Louis Park The authors are grateful for the valuable assistance of many other dedicated individuals who offered suggestions and edited versions of the report throughout its development. Special recognition goes to the following people: Nancy Larson, Director, Minnesota Association of Small Cities Tom Colbert, Director of Public Works, City of Eagan Joel Schilling, Past President, Minnesota Public Works Association Dave Hutton, Chair, City Engineers Association of Minnesota Legislative Committee David Sonnenberg, Former Director of Public Works/City Engineer, City of Minneapolis Duke Addicks, Special Counsel, League of Minnesota Cities John Flora, Former Director of Public Works, City of Fridley Julie Skallman, Mn/DOT State Aid Engineer Rick Kjonaas, Mn/DOT Assistant State Aid Engineer Thanks also to the Mn/DOT State Aid for Local Transportation Group for assisting with the cost of printing this report. About the Transportation Policy Institute The Transportation Policy Institute (TPI) is a not-for-profit, 501 (c)(3) research and educational organization. TPI's mission is to support development of a safe, efficient and effective multi-modal transportation infrastructure by providing timely and reliable information on transportation policy issues of interest to the public, local communities, businesses, transportation policy professionals, and state and federal lawmakers. Transportation Policy Institute Matt Shands, Director 2515 Wabash Ave. Suite #140 Saint Paul, Minnesota 55114 E-Mail: mshands(~tpi-online.org Telephone: (651) 917-2519 Table of Contents Executive Summary .......................................................................................... i Introduction ....................................................................................................... 1 Section 1: What does the city road and bridge system look like? ................ 4 City Roadways .................................................................................................... 4 City Bridges ....................................................................................................... 5 Section 2: How is the system funded? ...................................... ~ ...................... 6 Local Funding Sources ............................................................................................................ 6 State Funding Sources ............................................................................................................. 9 Federal Funding Sources ......................................................................................................... 15 Section 3: Why are existing funding sources insufficient? ............................ 16 Section 4: Key Findings / Policy Options ........................................................ 21 A. Alt City Systems .............................................................................................................. 23 B. Locally Funded City Streets - Cities under 5,000 ........................................................... 29 C. Locally Funded City Streets - Cities over 5,000 ............................................................. 33 D. State Funded City Streets- Cities over 5,000 ................................................................. 36 Section 5: Recommendations ........................................................................... 39 1. Provide funding for a "Local Road Improvement Program". ....................................... ...40 2. Provide cities greater flexibility to generate revenues through special assessments ....... 40 3. Provide cities with additional local taxing authority, including the authority to establish a "Transportation Utility". .................................................................................. 41 4. Enact legislation authorizing cities to establish "Impact Fees". ....................................... 41 5. Allocate a portion of the existing 5% special fund to cities under 5,000 ........................... 42 6. Allocate a portion of the MVST to a special fund for cities under 5,000 ......................... 42 7. Increase the level of funding to the MSA program ........................................................... 42 Conclusion ......................................................................................................... 44 Bibliography ............................................................................................................................. 45 Appendixes Appendix 1: Cities over 5,000 surveyed ................................................................................. 46 Appendix 2: Small cities under 5,000 surveyed ...................................................................... 47 Appendix 3: Additional Local Revenue Tools Available to Minnesota Cities ....................... 49 Appendix 4:2002 City Road and Bridge Funding Survey ..................................................... 51 Executive Summary Introduction The purpose of this report is to assemble in one place much of the "need-to-know" information on municipal road and bridge funding in Minnesota's 854 cities. This report builds off of the outstanding work done by Mn/DOT and others in their efforts to inform policy makers and citizens of the state who are interested in gaining a better understanding of the workings of road and bridge infrastructure investment in Minnesota. Our intent in preparing this report is twofold: First, the report can serve as a resource for policy makers, city officials, citizens, the news media and others in order to inform the discussion on city road and bridge infrastructure, and the way it is currently financed. Second, the report proposes seven specific recommendations that the Legislature can consider to address the funding challenges identified in the report. Section 1: What does the city road and bridge system look like? ~ According to the most recent information from the Minnesota Department of Transportation (Mn/DOT), Minnesota has over 135,000 miles of roadway in the state. About 14 percent of that total, equal to more than 19,000 miles is owned and operated by Minnesota's 854 cities. )~ This report distinguishes roadway mileage in Minnesota cities on the basis of two variables: funding source and city size. The report separately discusses the resulting three categories of city roads: 1) locally funded in cities under 5,000 population (1,703 miles, nine percent of total city mileage), 2) locally funded in cities over 5,000 (14,072 miles, 76 percent), and 3) state funded in cities over 5,000 (2,818 miles, 15 percent). > Minnesota cities are responsible for a total of 1,247 bridges representing 6.4 percent of the total bridges in the state. Section 2: How is the system funded? Minnesota's cities finance their road and bridge infrastructure through a variety of local, state and federal resources. The emphasis in this report will be on local and state funding sources, since the intended audience of this report is state and local officials. The majority of funding for city streets, even among cities eligible to receive state aid, comes primarily from local resources: property taxes, special assessments, and bonding. The most significant state source of funding is the Municipal State Aid program which is available only to cities over 5,000 in population and only supports 20 percent of those cities' total mileage. MSA funding since 1988 (the last state gas tax increase) has failed to keep up with inflation. Cities derive only a very small proportion of their total funding from federal sources. Section 3: Why are existing funding sources insufficient? > This section details a number of the most important demographic trends that are important to transportation system planners and elected officials as they consider options to address the current and future demands on roads and bridges in the state's 854 cities. 1. Traffic volumes are increasing. 2. Growth in city population and new housing is steadily increasing, placing greater demands on city and residential street systems. 3. Truck movement is also increasing significantly. 4. City road and bridge infrastructure is aging. Section 4: Findings and Policy Options Sections 1 through 3 of this report discuss general information on the current city road and bridge infrastructure, current funding mechanisms, and future funding challenges. This background information is critical to understanding the broad trends and policies that affect city policy makers as they strive to maintain and improve their transportation infrastructure while providing the best possible value to the taxpayer. In this section of the report, we attempt to identify and describe a handful of key findings that policy makers should be mindful of as they consider various transportation funding policy options, particularly as they relate to Minnesota city roads and bridges owned and maintained by Minnesota cities. The options presented in this section were the outcome of collaborative effort on the part of city staff and elected officials representing all of Minnesota's cities. A. All City Findings: #A-i' #A-2: #A-3' #A-4: #A-5: Systems Maintenance costs increase as road systems age. Cities have implemented a variety of strategies to address the maintenance funding gap. Cities have become more reliant on property taxes and special assessments. City bridges are in needs of repairs. Cities are often required to contribute to Mn/DOT and county road/County State Aid Highway projects located within city limits. Policy Options: 1. Provide funding for a "Local Road Improvement Program". 2. Provide cities greater flexibility to generate revenues through special assessments. 3. Provide cities with additional local taxing authority, including the authority to establish a "Transportation Utility". 4. Enact legislation authorizing cities to establish "Impact Fees". B. Locally Funded City Streets - Cities Under 5,000 Findings: #B-1: Most small cities are not spending enough on roadway capital improvements to maintain a 50 year life cycle. #B-2: Most small cities don't have a regular, annual road budget. #B-3: Small cities are heavily reliant on locally generated revenues. #B-4: On the whole, small cities don't receive significant resources from other local units of government for "shared" projects. Policy Options: 1. Provide funding for a "Local Road Improvement Program". 2. Allocate a portion of the existing 5% special fund to cities under 5,000 population. 3. Allocate a portion of the Motor Vehicle Sales Tax revenues to a special fund for cities under 5,000 population. ii C. Locally Funded City Streets - Cities Over 5,000 Findings: #C- 1: Most large cities are not spending enough on roadway capital improvements to maintain a 50 year life cycle. #C-2: The funding gap in MSA eligible cities is more severe on the locally funded roads than on the state funded MSA system. Policy Options: 1. 2. 3. 4. Provide funding for a "Local Road Improvement Program". Provide cities greater flexibility to generate revenues through special assessments. Provide cities with additional local taxing authority, including the authority to establish a "Transportation Utility". Enact legislation authorizing cities to establish "Impact Fees". D. State Funded Streets - Cities Over 5,000 Findings: #D- 1: The MSA system has grown much more rapidly since its inception 40 years ago than the state owned system or the county owned system over the same timeframe, yet the funding distribution has remained the same. #D-2: Current MSA funding levels do not cover the full costs of improving these cities' MSA street systems. #D-3: MSA systems are being funded at a level that will result in a 53-year life cycle. Policy Options: 1. Increase the level of funding to the Municipal State Aid program. Section 5: Recommendations > This section of the report provides greater detail on the seven po}icy options identified in Section 4. Conclusion The state should provide assistance to cities to address their Current and future funding shortfall by granting greater local revenue raising authority and by providing cities with additional tools to allow them to meet their specific needs. The sponsors of this report are also hopeful that the findings identified herein will encourage state and local policy makers to examine and consider capital investment policies, such as a statewide pavement management plan, that would make the most efficient use of scarce resources as the demands on the road and bridge network increase in the future. 111 Introduction Very few public issues in Minnesota these days are generating the same level of interest as transportation. News accounts regarding highway congestion, roadway safety, economic development, public transportation and other transportation-related issues have significantly increased the visibility of transportation as a critical function at the federal, state, and local levels of government. Indeed, it is difficult to find any other issue that has as broad an impact on more citizens than transportation. Not surprisingly, the increasing interest on the part of users of the transportation system has not gone unnoticed by policy makers. As a result, transportation and transportation funding is a "front burner" issue at the Minnesota State Legislature. Governor Pawlenty and the newly elected state legislature will consider a variety of transportation plans and funding options. Their actions will impact construction and maintenance on the state owned highway system and on the state's vast network of local roadways. State lawmakers are likely to formulate policy options on the basis of information provided by state and local agencies, including the Minnesota Department of Transportation (Mn/DOT), the League of Minnesota Cities, and other affected and interested organizations that assess the construction and maintenance needs on Minnesota's road systems. The purpose of this report is to assemble in one place much of the "need-to-know" information on municipal road and bridge funding in Minnesota's 854 cities. This report builds off of the outstanding work done by Mn/DOT and others in their efforts to inform policy makers and citizens of the state who are interested in gaining a better understanding of the workings of road and bridge infrastructure investment in Minnesota. Our intent in preparing this report is to provide a tool for policy makers, city officials, citizens, the news media and others in order to inform the discussion on these critical matters. The report sponsors hope that this report will serve as a useful reference guide for elected officials and others interested in learning more about the challenges facing Minnesota cities in their ongoing efforts to finance local road and bridge construction and maintenance. Organization of the Report The report contains four principal sections. The first three sections provide answers to the most fundamental questions regarding the challenges municipalities face in funding local roads and bridges. These sections of the report address the following questions: 1. What does the city road and bridge system look like? 2. How is the system funded? 3. Why are existing funding systems insufficient? Sections 1-3: "Transportation Primer" The first three sections can be thought of as a "Minnesota City Road and Bridge Primer". These sections address the most fundamental questions regarding the road and bridge transportation system in Minnesota cities. The first section contains a number of charts and tables that describe the current road and bridge inventory that exists in Minnesota's 854 cities. The second section contains a description of the federal, state, and local funding sources that support road and bridge investments, as well as information on the recent funding trends from each of these sources. The third and final section of the "Primer" documents key demographic and budget trends leading directly to the challenges facing city officials in their efforts to meet the needs on their local road and bridge systems. This section identifies trends describing the ever-increasing demands on Minnesota city roads and bridges on the one hand, and the limited available funding resources to address these demands on the other. Section 4-5: Transportation Funding Challenges, Policy Options and Recommendations The final two sections of this report focus on the future demands on the city road and bridge system, and the extent to which Minnesota cities are currently prepared and empowered to meet these demands. These sections of the report present specific findings which indicate that existing funding mechanisms will result in increasing budget shortfalls as cities struggle to address growing system demands. These sections of the report also present specific city road and bridge capital funding options and recommendations. Section 4 identifies and describes specific transportation funding challenges facing state and local policy makers, and potential policy options to address them. The discussion is organized by the principal roadway systems that comprise the total city-owned and maintained street inventory in Minnesota. The section is organized by roadway system so that city officials whose interest is primarily in one specific roadway classification will be able to focus on the information contained in that particular subsection. These subsections are indicated below: A. All City Systems: This subsection presents key findings potential policy responses that can apply to all Minnesota cities, regardless of size or roadway classification. Bo Locally Funded City Streets -Cities under 5,000: This subsection addresses 100 percent of roadways located in Minnesota's 724 cities with populations under 5,000. These cities are not eligible to receive state aid for local road and bridge funding from the Municipal State Aid program, and are obligated to finance all of their local road and bridge projects from their own revenue sources, typically financed with property taxes. Co Locally Funded City Streets - Cities over 5,000: This subsection addresses the 80 percent of city-owned roadways (which excludes state trunk highways and county roads) that are located in Minnesota's 130 largest cities. These roadways receive no state funding through the state aid formula known as Municipal State Aid (MSA), and are appropriately funded with locally generated revenues. State Funded City Streets - Cities over 5,000: This subsection addresses the 20 percent of city roadways in Minnesota's largest 130 cities that receive state aid funding from the MSA funding program. Research Methodology Two primary research methodologies were applied to derive the findings included in Section 4 of the report. First, the authors sought to find and display the most recent available data on subjects that involve city roads and bridge infrastructure in the state. Much of this information was provided by the Minnesota Department of Transportation (Mn/DOT) State Aid to Local Transportation Group, including information contained in the legislatively mandated report, "Legislative Study of State Funding for Local Road Improvements". Other sources of information include the Office of the State Auditor, and the Federal Highway Administration. Data sources are clearly indicated throughout the report. 2 A second source of information used to derive the findings in Section 4 was the information reported by Minnesota cities' staff in a survey taken during the fall and summer of 2002. The 2002 City Road and Bridge Funding Survey provides information on the experiences of 140 Minnesota cities, including 32 "large cities" with a population of over 5,000, and 108 cities with populations under 5,000. The survey was an effort to gain a better understanding of the specific challenges facing a cross section of Minnesota cities, and some of the strategies that they are employing to address these challenges. Appendixes 1 and 2 of the report list the cities whose information was collected and analyzed for this report. Appendix 4 is a copy of the survey. Project Sponsors This report was sponsored by two professional organizations that represent city engineers in Minnesota - the City Engineers Association of Minnesota (CEAM) and the Minnesota Chapter of the American Public Works Association (MPWA); and one statewide association representing municipalities generally in the state - the League of Minnesota Cities (LMC). These organizations and the municipalities they represent are strongly committed to providing the best possible local road and bridge transportation systems given the resources available. This report is intended to contribute to the discussion on city street financing by identifying the key challenges, and proposing specific recommendations that would enhance the ability of Minnesota cities to continue to provide safe and efficient road and bridge systems. Section 1: What does the city road and bridge system look like? Roads and bridges in Minnesota cities are a crucial component of the overall state surface transportation system. These roads and bridges are used for a wide variety of purposes. People who live or work within any of Minnesota's 854 cities use the system for virtually every trip they make. Those who live in rural areas of the state use the system on trips to the city, to go to school, to see the doctor, to shop, to go to a movie or a museum, or to visit family and friends who live in the city. Virtually alt trucks and delivery vehicles use City streets to move goods to market, since the vast majority of final destination points are located within Minnesota cities. These streets are critical in supporting two of Minnesota's key industries, manufacturing and agriculture. Finally, these street systems are also critical for the non-motorized traffic. Pedestrians and bicycles also rely on these systems to move from place to place in Minnesota cities. Minnesota city streets also play an important role in terms of the interconnectedness of the overall system. City streets have become more attractive to commuters and other users of the road system, especially as congestion worsens on the State Trunk Highway and county road systems. As a result, city street systems, including residential streets, are carrying ever-increasing volumes of traffic. City Roadways According to the most recent information from the Minnesota Department of Transportation (Mn/DOT), Minnesota has over 135,000 miles of roadway in the state. About 14 percent of that total, equal to more than 19,000 miles is owned and operated by Minnesota's 854 cities. Figure 1 shows the various systems of Figure 1 Minnesota Roadways Comparison of System Miles and Traffic Volume (I) Centerline Mileage Percentage of Percentage of Mileage Lane Miles Vehicle Miles System Miles Percent Miles Percent Traveled (VMT) Federal Agency 2,024 1.5% 4,057 1.5% -- Interstates & Trunk Highways 11,932 8.8% 29,024 10.4%, 61% County State Aid Highways 30,385 22.4% 61,718 22.2% 22% County Roads 15,016 11.1% 30,055 10.8% 2% Municipal State Aid Roads - Large Cities 2,818 2.1% 6,350 2.3% 8% City Streets - Large and Small Cities 15,775 11.6% 31,608 11.4% 5% Townships 56,445 41.7% 112,890 40.6% 2% Other 1,095 0.8% 2,194 0.8% -- Total 135,490 100% 277,896 100% 100% (1) It is important to understand that Minnesota cities also are frequently required to share in the costs of improvements and maintenance on Interstate, Trunk Highway, CSAH and County Road systems when they lie within city limits. Source: Minnesota Department of Transportation, from the Transportation Information System current as of May 28, 2002. http://www.dot.state.mn.us/tda/data/fzstmccs.pdf roadways, the miles in each system, and the share of vehicle miles traveled on each system. As the table shows, roadways in Minnesota's cities are jurisdictionally classified by Mn/DOT as either part of the Municipal State Aid (MSA) system, or simply as a "city street". At times, this terminology can result in some confusion, since any roadway in a Minnesota city may also be referred to as a "city street". This report distinguishes roadway mileage in Minnesota cities on the basis of two variables: funding source and city size. All city roadways are funded primarily through locally raised revenues (usually the property tax or special assessments) or state aid funds (Municipal State Aid funds). After the principal funding source is determined, roadway systems are distinguished by the size of the city in which they are located. This is a critical variable 4 since only cities with populations over 5,000 are eligible to receive state aid funding for their arterial streets through the MSA program. The result of this method of distinguishing between the various city roadway types is that this report focuses on Minnesota city roadway systems in one of three classifications. These systems are shown in Figure 2. As shown in the pie chart, the vast majority of total city owned roadways are funded with city revenue sources, usually the property tax. Only 15 percent of the total city mileage is eligible for state aid. Figure 2 Distribution of Minnesota City Roadway Mileage, 2002 State Funded Streets; Cities over 5.000 y ~ City Funded Streets; NN Cities over 5,000 14.072 miles (15 percent)/ / 2.818 miles City Funded Streets; Cities under 5,000 I 1.703 miles (9 oercent/ (76 percent) / For the remaining 85 percent, Source: Minnesota Departm~ construction and maintenance costs are the responsibility of the city, which usually means that they are funded from general operating revenues, i.e. the property tax, and other locally generated sources. City Bridges Because of the prevalence of agricultural and manufacturing industries throughout the state, bridges are a critical component of the overall transportation network. Ongoing preservation, improvement and construction of the state's bridges bolster economic development and mobility. For the typical automobile user, a well- maintained network of bridges is essential in maintaining access to activities, goods and services. Figure 3 at right shows the distribution of all bridges in the state 10 feet in length or greater by route system. As the chart indicates, there are a total of 1,247 bridges that are the responsibility of Minnesota cities, representing 6.4 percent of the total bridges. Figure 3 All Structures 10 Feet and Over in Length, 2001 Number of Percent of Structure Percent by Route System Structures Structures Deck Area Deck Area Interstate 1,340 6.8% 22,209,470 28.4% Trunk Highway 3,328 17.0% 25,200,334 32.3% County 7,710 39.3% 18,499,827 23.7% Township 5,974 30.5% 6,988,088 8.9% City 1,247 6.4% 5,223,281 6.7% Total 19,599 100% 78,121,000 100% Source: Minnesota Department of Transportation, Office of Bridges and Structures, 2001 Report. Section 2: How is the system funded? Understanding how the current transportation funding system works is critical for decision makers who want to deal responsibly with the maintenance and preservation needs of roads and bridges in Minnesota cities. Minnesota's cities finance their road and bridge infrastructure through a variety of local, state and federal resources. The emphasis in this report will be on local and state funding sources, since the intended audience of this report is state and local officials. Federal resources are described briefly, but since they do not represent a significant source of funding available to finance roads and bridges in most Minnesota cities, a detailed discussion of federal aid to cities is not included in this report. Local Funding Sources With few exceptions, Minnesota cities are reliant on their own, locally generated sources of revenue to finance most road and bridge infrastructure improvements. Figure 4 shows the share of state and local revenue sources supporting roads and bridges in Minnesota cities in 2000 according to data reported by cities to the State Auditor. As the chart indicates, the largest three sectors of the pie - proceeds from the sale of bonds, property taxes/special assessments, and local general funds -are all locally generated sources of revenue that are reliant on property taxes. These sources representing nearly 75 percent of all revenues used to support road and bridge construction by Minnesota cities. The distribution of revenues to cities shown in Figure 4 is consistent with the information reported by Minnesota cities in the 2002 City Road and Bridge Funding Survey conducted for this study. Figure 5 Figure 4 Distribution of ~nnesota Cities' Revenues for Roadw ay Furposes Maintnenance and Construction Costs, FY 2000 [] Interest · Miscellaneous ~ State General Earnings $37.2M Funds $52.3M % $116.5M 5% ~ 3% · Proceeds from 10% Sale of Bonds [] State Highw ay $168.7M User Taxes 15% $100.7M 9% [] Property Taxes/Special Assessments ~ $215.6M N 19% SAOuudr,~;:r Office of the State [] Local General Fund ~.~~ $437.6M 39% indicates that for cities under 5,000 who responded to the survey,, two-thirds of the road and bridge revenues come from property tax based revenues including bonding, special assessments, and general (property tax) revenues. For larger cities that are more reliant on state aid and other state and federal funding, the portion of property tax based revenues is well over 50%. 6 The findings from the survey illustrated in Figure 5 suggest that the cities responding to the survey were more reliant during the survey period of ! 997 through 2001 on state sources to support their road and bridge infrastructure maintenance and improvement programs than the average city. Figures 4 and 5 indicate that the average city receives about 19 percent of its total resources for roads and bridges from state sources, compared to about 23 percent for the sample of small cities surveyed, and 30 percent for the sample of large cities surveyed. The main point, however, is that cities of all sizes rely primarily on local revenue sources, funded by property taxes and property based assessments to finance their local road and bridge programs. Figure 5 Estimated Share of Road and Bridge Revenue Sources: 1997-2001 Cities Under 5,000 Other Federal Citi(;s Over 5,000 10.3% 1.3% q~ Other Federal 11.8% .5% State 23.8% Bonding State 14.9% Bonding 30.4% 17.6% Special Assessments Property Tax / ~ 18.3% 13.5% ¢- General Fund ii 36.2% i Note * Small cities under 5,000 typically do not receive the level of revenues from state sources that is depicted in this chart. The data collected from these cities in the 2002 City Road and Bridge Funding Survey show that just 26 of 108 cities surveyed received any state funds at all, and over 83 percent of all state funding went to just 8 cities (Bird Island, Frost, Jasper, Mahnomen, Melrose, Ortonville, Sherburne and Westbrook. 'roperty Tax / ~1 Fund 18.5% Source: 2002 City Road and Bridge Funding Survey It should be noted that there are a number of non-traditional local funding sources available to cities under certain circumstances. These would include tools such as tax increment financing, property tax abatements, special enterprise funds, and a few others that can work for some cities to help finance certain transportation infrastructure improvements. The availability of these funding sources, however, are limited and still represent the exception rather than the rule in terms of cities' use of these "creative" financing mechanisms as a principal tool. Most cities continue to finance road and bridge construction and maintenance with the traditional funding sources: property taxes, special assessments, and - to a lesser extent - local bonding authority. The following discussion describes these more common local funding sources. The other, less traditional funding sources are described briefly in Appendix 3. Local Property Taxes For the vast majority of Minnesota cities, the property tax base is the primary source of revenue for all city services, including road and bridge construction, maintenance and preservation. In short, the costs of local transportation that are not covered by some form of intergovernmental aid must be paid from locally generated sources of revenue. Since Minnesota cities have very limited flexibility to levy non- property tax revenues, the local property tax generally supports transportation infrastructure investments. State law currently restricts the ability of cities to increase property tax levies from one year to the next. The state imposes property tax levy limits on all Minnesota cities as a means of limiting property tax burdens on owners of all taxable property, including residential and commercial properties. The effect of levy limits on transportation investments is that city officials have had to be very selective in determining which projects and programs are approved and incorporated into capital improvement and maintenance plans. City General Obligation Bonds Cities have the authority to issue bonds to support capital construction programs. In effect, using bonding to finance public infrastructure improvements results in the cost of an improvement to be spread over the expected life of the improvement, rather than up front as the improvement is actually made. The total amount of debt Minnesota cities are authorized to issue is limited by the debt financing policies implemented by city elected officials. Usually, city officials are very reluctant to issue bonds which would require debt service levels that may jeopardize or threaten a city's bond rating. The 2002 Legislature adopted new legislation (M.S. §475.58, Subd. 3b) which allows a city to issue general obligation bonds to cover the entire cost of street reconstruction projects, without a referendum vote as is typically required. The bond issue can take place as long as the following conditions are met: 1) a public hearing on the issue must be conducted, 2) the Council must adopt a 5-year plan on the reconstruction project, 3) the bond issue, once approved, is subject to reverse referendum, and 4) the bond issue must maintain a total city net debt limit of no more than 2 percent of general fund spending. Another "borrowing" mechanism available to Minnesota cities for road and bridge improvements is the Transportation Revolving Loan Fund (TRLF). The TRLF is an innovative finance tool that can be used to finance transportation projects that may not get financed through traditional transportation funding methods. Established in 1997, the TRLF operates much like a commercial bank providing low interest loans to cities, counties, and other governmental entities for eligible transportation projects. When the loans are repaid, the funds are returned to the TRLF and used to finance additional transportation projects. It should be understood, however, that the TRLF is not a panacea for cities seeking low interest loan funding. A recent determination of the Minnesota Public Facilities Authority determined that revenue bonds could not be sold to finance local projects through the TRLF that were to be repaid with Municipal State Aid funds. As a result, less funding is available to finance local transportation projects. The important point to keep in mind regarding city bonding is that cities repay those bonds with property tax revenues. Issuing bonds generates revenues from the bond sales up front, but the debt must be paid back over time, with interest, and that is typically achieved by using the property tax. Special Assessments Under Minnesota Statutes §429, cities have the authority to assess property owners for certain local improvements based upon benefit received. Special assessments are a major source of funding for initial transportation improvements, and for that reason, they are more effective in cities that are still growing and adding new roadways than they do in cities that are fully developed. In short, special assessments are charges against real property for a specific project that directly benefits the property or properties being assessed. Special assessments are often preferable to financing road improvements with general property tax levies or bonding because they are viewed as a 8 more equitable way to distribute the costs to those who benefit the most, while minimizing the demand on the city tax levy and statutory debt limitations. Special assessments are workable in some circumstances, but not all. First, special assessment proceedings are cumbersome. The city must present evidence to prove that the assessment does not exceed the benefit, and in many instances, the cost of the improvement does in fact exceed the benefit to the properties, so the amount assessed fails to cover the expense. Most cities are able to special assess only 25 percent to 50 percent of street reconstruction projects. Second, local officials often have strong reservations about special assessments since they may result in financial hardship for certain residents, particularly those living on fixed incomes. Unlike the general property tax, special assessments are not tax deductible, so affected property owners must bear the full cost. State Funding Sources In general, the state of Minnesota has three ways to provide funding to Minnesota cities to support local roads and bridges: 1) regular state general fund appropriations, 2) the Municipal State Aid program, and 3) state bonding. General Fund Appropriations The state has at times appropriated state general funds for specific local road and bridge programs or projects. As an example, the state provided "one-time" funds during the 2000 Legislative session to specific city streets ($6.2 million) and to local bridges ($39 million for both city and county bridge structures). It is fair, however, to characterize the state general fund appropriations to Minnesota cities as limited, even during healthy economic times. Municipal State Aid (MSA) The second way that Minnesota cities receive funding directly from the state is through the Municipal State Aid (MSA) program, which was first implemented in 1958. The MSA program is administered by the Mn/DOT State Aid for Local Transportation Group, and provides funding to support city roads and bridges in cities in which the population exceeds 5,000. In 2002, 130 cities qualified for MSA assistance. MSA provides funding support for 2,818 miles of roadway, which is about 15 percent of the total city street mileage statewide (including all Minnesota cities - MSA eligible large cities and the remaining small cities). If one considers only the mileage in the 130 MSA eligible cities, the program provides aid to support about 20 percent of those cities' total mileage. The MSA program provided $117 million to eligible cities in 2001. Cities that receive MSA may use the payment to support maintenance and construction on its eligible mileage by using any of the following options: · Use the current allocation tofinance currentprojects. Borrow against the city's future MSA allocation. This option, known as the General Fund Advance option, allows a city to borrow funds for improvements from the city's general fund, and with the approval of the Minnesota Department of Transportation, repay the loan with the city's annual MSA allocation over a period not to exceed the following five years. · Issue bonds that can be repaid with MSA funds. The city is limited to borrowing no more than the amount that will allows the annual debt service to be less than 50 percent of the city's most recent annual MSA construction allocation. · Use MSAfunds to fulfill costparticipation responsibilities associated with county or Mn/DOT projects. · Request funds from the state's "turnback" account. This option applies only in specific circumstances. Under state law, if Mn/DOT "turns back" a former Trunk Highway to a local unit of government, the local unit is eligible for special funding from the state turnback account. These funds are in short supply, and this strategy is not used by the vast majority of Minnesota cities. Combine MSA dollars with special assessments. The MSA mileage for each eligible city is certified by the Minnesota Department of Transportation, and is derived by adding up 20% of the city's local roads and 100% of any Trunk Highway Turnback mileage. The current MSA distribution formula is based 50% on each eligible cities population, and 50% on "city needs". According to the Mn/DOT 2002 MSA Street Apportionment Data report, Construction (Money) Needs is defined as the estimated cost of constructing and maintaining the MSA system over a period of 20 years. Section 4 of this report includes key findings and recommendations on the MSA system in Minnesota, including assertions on the adequacy of the MSA funding levels. MSA Funding Sources: Motor Fuel Taxes, Tab Fees, MVST General Fund Transfer The primary source of funding to the MSA program is the revenues to the State Highway User Tax Distribution Fund (HUTDF), namely the state motor fuels tax and the vehicle license registration fee, or "tab fee" as it is often called. In addition, the Legislature has recently dedicated a portion of revenues from the 6.5% Motor Vehicle Sales Tax by transferring these revenues from the state general fund to the Highway User Tax Distribution Fund. The MSA program is funded at nine percent of the revenues to the HUTDF. Sixty-two percent of the revenues are dedicated for construction and maintenance of the State Trunk Highway System, and 29 percent is dedicated to Minnesota Counties for the County State Aid Highway system. The flowchart (Figure 6) on the following page illustrates the flow of funds from state highway user and general fund sources to the State Trunk Highway system and local units of government in Minnesota. Dollars indicated are final amounts for the state fiscal year 2001. 10 Figure 6 Highway Funding in Minnesota Final FY 2001 License Tab Fees General Fund Approp. $161.5M Gas Tax Revenue $608.4M Federal Aid I $391M Driver's License Revenue $22.1M Other I $73.4M Trunk H/g/may Fund $1,236.5M 62% 290/0 9% County State Aid Highway Fund- Regular $327.6M Highway User Tax Distribution Fund (HUTDF) $1,214M g&nicipal State Aid I-lighntty Fund $117.6M 5% 5% Special Fund $60M Flexible Highway Account $32.5M Township Roads and $28.2M Source: Minnesota Department of Transportation Distribution of the Highway User Tax Distribution Fund is determined by the State Constitution Funding for Minnesota's Highway System comes mainly from the Highway User Tax Distribution Fund established in Article XIV of the Minnesota Constitution. The State Constitution provides that revenues from the state's motor fuel tax (gas tax) and motor vehicle registration tax (license tab fees) are dedicated to the state Highway User Tax Distribution Fund and must be used "solely for highway purposes". 11 As Figure 6 shows, the state Constitution allows five percent of the total HUTDF revenues to be allocated "off the top" and apportioned among the three funds (trunk highway, county state aid and municipal state aid). The allocation of the five percent special fund is made on the basis of a statutory formula that the legislature may change only once every six years. The last change was made in 1998, so it will be up for reconsideration in the 2004 legislative session. The current distribution of the 5 percent special distribution is as follows: 16% to the Town Bridge Account 30.5% to the Town Road Account 53.5% to the Flexible Highway Account (used to restore former state trunk highways that have been reverted to cities and counties and designated as MSA and CSAH system roadways. These are referred to as "turnbacks".) As illustrated in the chart, the distribution of the remaining 95 percent of the revenue in the HUTDF is distributed as follows: · 62% to the Trunk Highway Fund · 29% to the County State Aid (CSAH) fund · 9% to the Municipal State Aid (MSA) fund only for those cities with a population over 5,000. Statutory Distribution of Funds Among Minnesota Cities The total distribution of dollars provided by Minnesota cities and counties is governed by the State Constitution, however, the Legislature determines the distribution among Minnesota's cities and counties by formulae that are established by state law. Figure 7 on the following page illustrates the current funding distribution formulae for the County State Aid Highway (CSAH) system and the Municipal State Aid system. Figure 7 95% Highway User Tax Distribution Fund (HUTDF) 5% 62% 29% 9% County State Aid Highway (Special) Tmnk Highway Fund County State Aid Highway CSAH -Regular 50% Population Municipal State Aid (lVlSA) 50% Construc. Needs 53.5% ~ Flexible Highway Account 10% Equal Distribution to All Counties 10% Vehicle Registration 30% Mileage 50% Needs 46.5% IZ Township Roads and Bridges Source: Mn/DOT State Aid to Local Transportation Group A Brief Analysis of MSA Funding Trends Much of the discussion concerning transportation funding options in recent years at the Minnesota State Legislature has involved discussion over changes to the fuel tax and motor vehicle license tax rates. Fuel taxes, in particular, have been the focus of many transportation funding advocates who have supported a "permanent" new funding source for transportation infrastructure. Figures 8, 9, and 10, illustrate a primary argument often made by advocates of a fuel tax increase. The premise of the argument is that because the state fuel tax has not been increased since 1988, the real purchasing power of the fuel tax has declined steadily since that time. Figure 8 Comparing State Fuel Tax Revenues 1988-2001 Current Dollars vs. Inflation Adjusted Dollars ($ Thousands) r * Actual Gas Tax Revenues ~ CPi Adjusted $700,000 $600,000 $5oo,ooo $400,000 $3OO,000 $2OO,000 $100,000 $o Source: Mn/DOT and Transportationa Policy Institute Figure 9 compares the current statewide gas tax revenues from 1988 through 2001 to the gas tax revenues adjusted for inflation on the basis of the Consumer Price Index. As the chart shows, there has been steady growth in current revenues, but taking into account the effects of inflation means that there has actually been a slight reduction in the purchasing power of the gas tax since 1988. Figure 9 illustrates the decline of the value of the gas tax in a different way. In terms of the actual purchasing power of the fuel tax, the twenty-cent per gallon fuel tax has a purchasing power of 13.37 cents in 1988 dollars, so the value of the gas tax has decreased by 33 percent since 1988 in real terms. (Another way to make the same point is that if the 20-cent fuel tax had been increased annually since 1988 to adjust for the inflationary effects, the rate in 2001 would be 29.92 cents per gallon.) Figure 9 Minnesota Fuel Tax Rate 1988-2001 Com paring 20.cent Statutory Rate to Inflation Adjusted Rate 25 c 20 0 ~ ~5 ¢ 10 o 5 Statutory 20-cent rate 1988 90 92 94 96 98 O0 Source: Transportation Policy Institute 13 The other primary funding source to the Highway User Tax Distribution Fund is the Motor Vehicle Registration Fee. Figure 10 shows how inflation has eroded revenues from the Motor Vehicle Registration Fee, just as it has eroded gas tax revenues. (The sharp decline in 2001 was a result of a reduction in the Motor Vehicle Registration Fee, which was offset by an increased General Fund contribution to the Highway User Tax Distribution Fund.) Two important conclusions can be drawn from the MSA revenue trends and their impact on city road and bridge financing. First, the "growth" in MSA funds to cities has actually been significantly tempered by the inflationary impacts as the costs associated with road and bridge construction and maintenance have increased. $700.0 Figure 10 Motor Vehicle Registration Fee Revenues; 1991-2001 Current Dollars vs. Inflation Adjusted Dollars $800.0 $500.0 $400.0 $200.05300'0 [ · Vehicle Registration FeesII --'~-~ Vehicle Registration Fees in I 1991 Dollars I $100.0 $0.0 1991 1992 1993 19oM~ 1995 1996 1997 1998 1999 ~ 2001 Source: Transportation Policy Institute Making matters worse, these funds have had to be spread even thinner over the years as more cities and roadway mileage have been added to the MSA system, and the condition of much of the MSA system has deteriorated as the system has aged. Second, as the actual purchasing power of the aid to large Minnesota cities through the MSA program has failed to meet the increasing construction and maintenance costs, MSA eligible cities have had to rely more heavily on their own locally generated resources to meet both their MSA system needs and the many underfunded needs on their non-MSA systems. State Bonding Just as city governments have the authority to issue their own bonds to support road and bridge infrastructure investments, the state government has the authority to issue bonds for the expressed purpose of generating resources specifically for local road and bridge needs. State bonds to support local road and bridge construction and maintenance are backed by general fund revenues and are typically included in the capital bonding bill passed by the Legislature in even-year sessions. These bonds have in the past been used to support such purposes as local bridge construction, e.g. the Local Bridge Replacement Program, Minnesota Statutes § 174.50. The Local Bridge Replacement Program was initiated in 1976, and has provided various amounts of legislative funding to Minnesota cities and counties over the years. In 1998, the Legislature passed a $34 million program, the largest annual allotment since 1979 (when $52 million in local bridge bonding authority was approved). In the ten-year period from 1990 through 1999, the program provided an average of $8 million each year to finance local bridge replacement and rehabilitation. It is important to emphasize that state bridge bonds generally match or supplement other bridge repair and replacement resources, such as federal aid, County State Aid and Municipal State Aid allotments, resources from the state Town Bridge Account (funded by the Highway User Tax Distribution Fund) and the local property tax. Bond funds are often the catalyst that allows the bridge to be replaced or rehabilitated. Historically, bridge bonds typically provide 20% to 40% of a project's cost. It should also be noted that the Minnesota Department of Trade and Economic Development administers certain state economic development grant and loan programs that provide limited funding for local transportation infrastructure improvements. 14 Federal Funding Sources Minnesota receives federal funds under the Transportation Equity Act for the 21st Century (TEA-21), which is a six year transportation finance bill that will provide roughly $400 million to Minnesota in federal fiscal year 2002 (October 1, 2001 through September 30, 2002). Federal revenues come in a variety of different programs, and are mostly used to support construction and maintenance of state road and bridge systems. TEA-21 will expire in FFY2003 and Congress is preparing to consider the next transportation funding bill. Federal funding, which comes primarily from the 18.4- cent federal motor fuels tax, is distributed to specific competitive projects within the state through eight Area Transportation Partnerships (ATPs). ATP members include representatives of Minnesota cities and counties, the state Department of Transportation, transit agencies, and regional planning organizations. Figure 11 Federal Funds to Minnesota's Area Transportation Partnerships FY 2003-2005 Federal Fund District Share Target ATP (Percent) ($Millions) 1 9.6% $32 2 5.6% $18 3 11.4% $38 4 6.6% $22 6 -9.9% $33 7 7.5% $25 8 6.0% $20 M 43.4% $143 Total 10010% $331 Source: Mn/DOT Office of Inv. Mgmt. The flow chart below in Figure 12 shows an estimate of federal funds for FY 2003-2005 from the federal government to Minnesota local units of government, including both Minnesota cities and counties. The key point illustrated in this chart is that Minnesota cities compete among themselves and also Minnesota counties for about $104 million in federal funds for 2003-2005. (Note: In 2001, roughly two-thirds of the federal funding for road and bridge improvements for Minnesota local governments was provided to Minnesota counties, and one-third was provided to Minnesota cities.) Figure 12 Federal Funding to Minnesota Local Governments - FY 2003-2005 Local: 40% $57 million Metro: 43.4% $143 Million State: 60% $86 million ATP Target: $331 Million Greater Minnesota: 56.6% $187 Million I Local: 25% $47 million State: 75% $140 Million Source: MrffDOT Office of Investment Management 15 Section 3: Why are existing funding sources insufficient? Sections 1 and 2 dealt with the questions: "What does the city road and bridge system look like?" and "How is it funded?" In this section of the report, the focus is shifted to a question that lies at the heart of policy debate on transportation infrastructure investments: "Is current funding adequate, and if not, why not?" This section will briefly identify and describe some of the key variables that are influencing the increasing gap between available resources and the capital and maintenance program needs present in Minnesota cities. This section details a number of the most important demographic trends that are important to transportation system planners and elected officials as they consider options to address the current and future demands on roads and bridges in the state's 854 cities. 1. Traffic volumes are increasing. The map and table below in Figure 13 show the increases in the percentage of vehicle miles traveled (VMT) on all streets and highways by Mn/DOT transportation district. These substantial increases in VMT are a reflection of the increases in population growth and economic development. Figure 13 Increase in Vehicle Miles Traveled, All Route Systems 1990 - 2000 District 1 20% District 2 22% District 3 50% District 4 24% Metro District 35% District 6 29% District 7 20% District 8 21% Source: Mn/DOT Office of Investment Management Mn/DOT reports that the VMT growth trends continue to increase. According to the Mn/DOT 20- Year Transportation Plan, the average annual increase in total VMT between 1990 and 1995 was 2.5% per year compared to 3.6% per year between 1995 and 2000. 16 The statewide traffic chart on the previous page illustrates the growth in total Vehicle Miles Traveled on all route systems. This data obviously has a direct bearing on the overall demands on all roadway infrastructure in the state. It is also important, however, to present the increasing traffic loads for each of the major systems. This information is illustrated in Figure 14. The chart shows that steady increases have occurred since 1995 in average daily traffic on the state trunk highway and interstate systems, the County State Aid Highway system, and the Municipal State Aid systems. While its total ADT is less than the other systems, it is notable that the rate of growth in ADT on the MSA system exceeded the other two systems since 1995. One reason Figure 14 Percent Increase: Avg. Daily Traffic by Route System 1995 to 2001 , 35.0% 30.0% 25.0% 2O.O% 15.0% 10.0% 5.0% 0.0% Interstate & Trunk CSAH Highways MSA Source: 1995 ADT data reported in "1997 Municipal State Aid Life Cycle Analysis" by the 1997 State Aid Allocation Subcommittee. 2001 ADT data provided by Mn/DOT Office of Transportation Data and Analysis. for this is that as congestion limits the flow of traffic on the trunk highway systems and the other arterials on the county road system, many motorists are opting to take local roads, which increases the burden on these roads beyond their intended levels. 2. Growth in city population and new housing is steadily increasing, placing greater demands on city and residential street systems. Many new homes have been constructed in Minnesota's cities over the last ten years where limited roadway infrastructure previously existed. Figure 15 shows the increases over the last decade in population and households in Minnesota cities. As the chart indicates, the population in Minnesota cities has increased from 3.44 million in 1990 to 4.0 million in 2001. At the same time, the household count of all Figure 15 Comparing Minnesota City Population and Households (1990 - 2001) ., 5,000 i ~ 1990 12001 I-- 4,000 3,000 2,000 1,000 0 City Population Source: Property Tax Study Project r City Households Minnesota cities has increased from 1.33 million in 1990 and 1.57 million in 2001. Overall, the number of residential homesteads - much of which requires newly constructed street and other public infrastructure - has increased by 9.2% since 1990. The "densification" of Minnesota's cities, in both the metropolitan areas and in Greater Minnesota, has led to greater amounts of traffic and higher levels of congestion. 17 3. Truck movement is also increasing significantly. Minnesota's economic growth, just-in-time delivery practices, and the increasing use of on-line shopping are contributing to increasing demands on Minnesota roadways by the trucking industry. According to recent estimates, truck traffic on Minnesota roadways is increasing about two percent per year. According to recent figures from the Minnesota Trucking Association, trucks deliver freight for over 9,000 manufacturing companies in the state, which represent 88% of all manufactured freight transported in Minnesota. Trucks supply goods to over 28,000 retail stores, and stock 1,162 wholesale trade companies. In addition, trucks supply goods to over 3,000 agriculture-related businesses in the state. A great many of these destinations are located within city borders, so city streets are critical to the safe and efficient movement of freight throughout the state. 1,800 Figure 16 Truck Vehicle Miles of Travel: All Roadways 1991 - 1999 ,600 ,400 ,200 ,000 800 600 400 200 0 1991' 1992 1993' 1994 1995 1996 1997 1998' 1999 Source: 2002 Economic Report to the Governor. * 1991 and 1993 precise figures unavailable. Estimates for these years are presented based on historical trends. A new methodology for estimation was implemented in 1998. 4. City road and bridge infrastructure is aging. City Roads Most of the data on the aging of the street infrastructure in Minnesota cities is limited to only the 15 percent of the overall mileage that is part of the Municipal State Aid system. The State Aid for Local Transportation Group of MnDOT maintains these records in order to determine state MSA allotments. In general, cities do not report data concerning the aging of the city streets which are funded with locally generated revenue. Figure 17 In an effort to assess the needs of the locally funded city street system and of the MSA system in larger cities, the 2002 City Road and Bridge Survey asked cities to supply spending trends on each system over the last five years. Using mileage data available through Mn/DOT, we were able to derive the "spending per mile" for the construction and maintenance costs on the MSA system compared to the spending per Average Spending per Mile for Each of the 3 City Road Categories $40 ~" $35 · - $30 ~$25 ff--$~5 $40 $5 MSASystem, Cities Over 5,000 LocallyFunded CityStreets, - Total Mileage 2,818 Cities O¥~r 5,000 - Total Mileage 14,072 Locally Funded City Streets, Cities Under 5,000 - Total Mileage 1,703 Source: 2002 City Road and Bridge Funding Survey mile cost on the locally funded city street system This relationship is displayed in Figure 17. Based on the survey results, the average MSA eligible city spent just over $35,000 per mile for roadway construction and maintenance between 1997 and 2001. This compares to average annual 18 spending per mile of about $18,000 on the city financed city street system in larger cities and about $10,000 per mile on the city funded street system in the smaller cities. Mn/DOT reports show that the MSA system is aging. One such indicator shows that the percentage of MSA surface over 40 years old has increased from 62.4 percent in 1998 to about 64.4 percent in 2001. Because spending per mile is roughly twice as high on the MSA system compared to the locally financed system in large cities, and over 3 times as high as the spending per mite on the city streets in smaller (non-MSA eligible cities), it is fair to conclude that the city financed street systems in most areas are aging faster than the MSA system roadways. City Bridges Bridges are a critical component of the state's transportation infrastructure. A single deficient bridge can restrict access, create unsafe situations, and result in costly detours. Several factors are contributing to increasing demands on Minnesota's bridges. As roadways are reconstructed to carry heavier loads, bridges become less capable of maintaining the overall level of traffic on the transportation system. The aging of the local bridge infrastructure, combined with increased freight loads and higher levels of traffic, are exacerbating the rate of deterioration of the · bridges on local roadways. Finding adequate resources to fund local bridge repair and replacement is a growing challenge for state and local governments striving to meet the needs and expectations of Minnesota roadway users. Minnesota cities own over 1,200 bridges on the Municipal State Aid system and their municipal street systems. Although this represents a modest share of the total number of bridges in Minnesota, (6.27% of the total, or 7.40% of those over 100 feet in length) the fact remains that these bridges are a critical element of the transportation network in Minnesota cities. Slow but steady progress has been made in reducing the number of deficient bridges on the local roads system. In recent years, for every existing bridge that has been added to the list of deficient structures, roughly two deficient bridges have been replaced and thereby removed from the list. Figure 18 shows the state's progress at reducing the number of deficient total local bridges, including city, county, and township bridges since 1977. Figure 18 Deficient Local Bridges (1977 - 1999) 6,000 5,000 4,000 3,000 2,000 1,0oo o While the level of Year investment in bridge Source: Mn/DOT Office of Bridges and Structures repair and replacement in Note: The cause of the upward shift in the number of local deficient bridges in the state beginning in 1989 is the result of changes in the federal criteria used to determine whether or not a bridge is deficient. recent years has resulted in a steady net reduction of the total number of deficient local bridges, one cannot infer that the same level of commitment will result in similar progress in the future. In the next ten to twenty years, the demand for resources to replace and repair deficient local bridges will increase si~o-nificantly due to the aging of the local bridge inventory combined with the larger deck size requirements of newer bridges. 19 A bridge generally has a useful life of 60-70 years before deterioration or obsolescence requires that the bridge be replaced. A deficient bridge is defined as one that is structurally deficient or functionally obsolete, with at least one of the following characteristics: 1) limited load carrying capacity due to deteriorated structural elements, 2) dangerously narrow, 3) too low a clearance for some vehicles to safely pass under, and 4) inadequate protection from high water, and 5) inadequate approach roadway geometry. Figure 19 Age of Minnesota's MSA and City Bridges 10 ft and O~er by Decade Constructed 300 Maturing bridges requiring greater maintenance and rehabilitation 25O ~ 200 Figure 19 shows the -'~ 150 number of the state's city m ~, 100 bridge inventory by the 50 decade in which a bridge I 0 was constructed. As the figure indicates, there is an impending "wave" of aging and larger bridges that are coming to the end of their anticipated life cycle. demands on the system continue to increase. volumes than they have in the past. useful life, reconstruction necessary ...... Moreover, in addition to the aging of the bridge infrastructure, Bridges are supporting heavier loads and higher traffic The network of highways and city streets located in Minnesota cities are facing increasing demands as the number of system users and the intensity of system usage both increase. The inability of. Minnesota cities' to meet the increasing demands on their road and bridge infrastructure is taking its toll on the condition of roadway infrastructure. As a result, policy makers in large and small Minnesota cities are finding it more and more difficult to address a wide variety of public policy objectives that all rely on sound transportation systems. For example, the potential for economic expansion is stifled as transportation dependent companies find it more and more difficult to move people and goods. Quality of life factors are compromised as people spend more time sitting in their vehicles and less time at more productive activities. 20 Section 4: Key Findings / Policy Options The previous sections of this report have provided general information on the current city road and bridge infrastructure, current funding mechanisms, and future funding challenges. The back~ound information provided in the "transportation primer" contained in Sections 1 - 3 is critica! to understanding the broad trends and policies that affect city policy makers as they strive to maintain and improve their transportation infrastructure while providing the best possible value to the taxpayer. In this section of the report, the focus is shifted to a discussion of key findings relating to current road and bridge infrastructure investment trends, and their impact on Minnesota cities' ability to invest in road and bridge maintenance and improvements. Following the discussion of the key findings, the report suggests specific policy options that merit consideration by state policy makers as a means of providing tools to assist cities in their efforts to maintain their road and bridge capital assets. The findings and policy options presented in this section are organized such that the findings and policy options involving certain types of city roadways are contained in a single subsection. The only exception is the first subsection, which contains findings and policy options that apply to all roadway types, regardless of city size or the funding source. The purpose for organizing the key findings and policy options in this manner is to facilitate review of the report by policy makers and others who are primarily interested in the findings and policy options that involve specific city road and bridge systems. For that reason, the subsections are organized as follows: All City Systems: This subsection presents key findings and potential policy responses that apply to all Minnesota cities, regardless of size or roadway classification. Locally Funded City Streets - Cities under 5,000: This subsection addresses 100 percent of roadways located in Minnesota's 724 cities with populations under 5,000. These cities are not eligible to receive state aid for local road and bridge funding from the Municipal State Aid program, and are obligated to finance all of their local road and bridge projects with their own revenue sources. Locally Funded City Streets - Cities over 5,000: This subsection addresses the 80 percent of city roadways (excluding state trunk highway and county roadways) located in Minnesota's 130 largest cities that receive no state funding through the state aid formula known as Municipal State Aid (MSA). These roadways are appropriately funded with locally generated revenues. State Funded City Streets - Cities Over 5,000: This subsection addresses 20 percent of city roadways in Minnesota's largest 130 cities that receive state aid funding from the MSA program. The findings reported in this section come from two primary sources. First, two divisions of the Minnesota Department of Transportation: the State Aid for Local Transportation Group and the Office of Transportation Data and Analysis generously provided staff assistance as well as a number of valuable written and electronic reports focusing on the roadway construction and maintenance needs of Minnesota cities. (For example, the "Legislative Study of State Funding for Local Road Improvements" prepared by Mn/DOT's State Aid for Local Transportation Group at the request of the 2000 Legislature was a primary source of information used in this report.) 21 Second, a significant number of Minnesota cities responded to the 2002 City Road and Bridge Funding Survey prepared in conjunction with this report. (See Appendix 1 and 2 for a list of responding cities, and Appendix 3 for a copy of the survey.) This survey was prepared in an effort to collect specific information on the recent funding trends and challenges facing local officials. The survey requested that city officials report on their road and bridge funding histories over the last five years, and also that they describe some of the future challenges anticipated in their efforts to invest in their road and bridge capital assets. As indicated above, each subsection also identifies policy options relating to the specific road system addressed in that subsection. Each of these policy options merit consideration by state and local policy makers as a means of addressing the city road and bridge infrastructure financing shortfall. While these policy options are simply identified briefly in this section of the report, they are spelled out in slightly greater detail in Section 5. It is important to note that the options presented in this section were the outcome of collaborative effort on the part of many representatives of Minnesota city governments, including city staff with responsibility over road maintenance, and elected officials. 22 A. All City Systems This subsection provides a number of broad findings that are representative of the experiences of all Minnesota cities, not exclusively large or small cities. The findings presented in this subsection also are applicable to city streets funded predominantly with locally generated property tax revenues, and roadways supported by Municipal State Aid. Findings #A-l: Maintenance costs increase as road systems age. Figure 20 illustrates the relationship between the age of a roadway system, the condition of the pavement surface, and the cost to improve it. The cost to improve a roadway surface increases as the pavement surface deteriorates over time. Put another way, timely maintenance is not only effective in improving roadway surfaces, but it saves money over the long run. Pa. ,,e~t e~t t L ire This relationship is widely accepted, and was reflected by many of the comments and the data provided in the 2002 City Road and Bridge Funding Survey. Figures 21 and 22 on the following page reflect the road construction vs. maintenance spending trends for 32 large cities (populations over 5,000 and MSA eligible) and 108 smaller cities (under 5,000) that were reported in the survey. 23 their annual road improvement budgets to maintenance. The annual appropriation committed to maintenance among this sample of cities has been growing at a rate of about 4 percent per year. Spending on construction, meanwhile, has stabilized over the last three years. These trends would suggest that cities are Figure 21 shows the distribution of spending between construction and maintenance during the years 1997 through 2001 for a representative sample of the larger Minnesota cities. The spending trends reported by these cities suggest that larger cities in Minnesota are dedicating slightly more than half of Figure 21: Construction and Maintenance Trends for 32 Cities over 5,000 I1 Total Maintenance (MSA and City Street System) I ] Total Construction / Reconstruction (MSA and City Street System)i $250 ~ $200 ~ ~ $150 '~ $100 I-- $5O $- 1997 1998 1999 ',1 Total Maintenance (MSA and City I $111,463,945 $113,680,899 $118,110,185 [__S!reet S~,tem> .......... !_ _ ~ . ~f~lAC~anndS~;t~t~e/etl~esCyOs;;tmr~Ction! $74,280,258 ! $83,203,789 '-i95:i~',6~0- $93,178,892 Source: 2002 City Road and Bridge Funding Survey committing a greater share of funds to maintenance in order to save money by deferring more substantial construction and reconstruction costs. This conclusion is supported by the narrative explanations provided by cities responding to the survey. Figure 22 shows the same relationShip for cities under 5,000 in population who receive no state assistance through the MSA program. Once again, the general spending trend on total construction and maintenance is slowly increasing, however- unlike the larger cities - construction and reconstruction appears to be the driving force behind the annual budget increases. One reason that reconstruction and construction represents a greater share of the annual budget than maintenance in these smaller cities is that Figure 22: Construction and Maintenance Spending Trends for 108 Cities Under 5,000 ~l[] Construction · Maintenance $25 ._q ~ $20 o $15 $10 $5 1997 1998 1999 il Maintenance $7,249,743i$7,513,867~$7,319,363 Construction $3,412,3601 $~0~'~I-$7,927,197 2000 2001 $7,865,602 $8,947,363 $7,840,401 $10,251,98 Source:2002 City Road and Bridge Funding Survey many of these cities are adding capacity to meet the demands of growing populations, and the additional demands brought on by new housing and economic development. As a result, these cittes have less to apply to regular maintenance activities which may be more costly over the long run. #A-2: Cities have implemented a variety of strategies to address the maintenance funding gap. The 2002 City Road and Bridge Funding Survey specifically asked cities to identify any funding strategies they employ in an effort to maximize the efficiency of their road construction and 24 maintenance spending. Although not all cities submitted responses to the question, the answers that were provided offer anecdotal evidence suggesting that many cities are actively pursuing measures designed to get the best possible value out of their existing road and bridge capital spending programs. The results from the survey are presented in Figure 23. Figure 23 Frequency of Responses: Strategies Used by Cities to Maximize Efficiency of Capital Construction / Maintenance Program 140 Minnesota Cities Surveyed Cities Utilizing Spending Side Strategy Delay reconstruction (lower acceptable standards), 38 emphasize maintenance Implementing Pavement Management Program 16 Allowing narrow or "rural" sections, no curb/gutter, less 9 storm sewers, gravel surface Use cheaper materials/miscellaneous cost saving measures 7 Recycle materials 4 Public education to reduce expectations 2 Delay non-essential building and equipment purchases 2 Combine street reconstruction with utility replacement 2 Set-aside funds for future needs 2 Reduce street reconstruction by televising sewer lines 2 Revenue Side Increase reliance on bonding, assessments, tax abatements 16 Partnerships with other government agencies 11 Expanded Developer Fees 5 More aggressively seeking federal, special state funds 3 Aggressive grant, loan opportunities 3 Increase use of reserves 2 Looking to Utility Districts to pick up costs 2 Source: 2002 City Road and Bridge Funding Survey, Transportation Policy Institute 25 #A-3: Cities have become more reliant on property taxes and special assessments. In spite of recent news accounts to the contrary, many state and local lawmakers have worked hard in recent years to limit local property tax burdens. There are a variety of policy reasons for pursuing lower property tax burdens, but the two key arguments are that exising property taxes are already too high, and that the property tax is not generally directly related to the taxpayer's "ability to pay". Figure 24 shows that funding for city roads and bridges has run counter to this objective, and that property tax-based $5OO $450 $400 $350 $300 $25o $2oo $150 $1oo $5o $o Source: Office Figure 24 Since 1990, there has been a growing reliance on the sources of funding that are most reliant on property taxes and special assessments I [] 1990 Revenues · 2000 Revenues ~ r These sources are funded with property tax based revenues of the State Auditor revenues have become the most significant new source of funding for city roads and bridges. (In fact, this should not be too surprising since property tax-based revenues are often the only practical funding source available, as this report has shown.) #A-4: City bridges are in needs of repairs. Figure 25 was presented earlier in the report (as Figure 19 on page 21) and is repeated here to emphasize that city bridges are aging, and as the bridges built prior to 1950 age and approach the end of their useful lives, more and more bridges will require major repair and reconstruction. Figure 25 Age of Minnesota's MSA and City Bridges 10 Feet and Over by Decade Constructed 3OO 25O 2O0 150 lO0 50 0 Bridges approaching the end of their Maturing bridges requiring greater maintenance and rehabilitation The Mn/DOT Office of Bridges and Structures prepares an annual report on the condition of all Minnesota's state and locally owned bridges. For purposes of assessing the level of unfunded need to improve the deficient bridges on the local system, the Mn/DOT Office of Bridges and Structures has estimated the costs to improve these bridges so that they would no longer be classified as deficient. Figure 26 shows the estimated improvement costs to upgrade all deficiencies on bridges in the MSA and city street systems with sufficiency ratings less than 80%. 26 Figure 26 Total Estimated City Bridge, Bridges 10 Feet and Over Structurally Deficient and Functionally Obsolete Bridges - Sufficiency Rating Less Than 80 2000 Estimated Total Bridges Deficient Bridges Improvement Costs Average Cost/Bridge 1,247 316 $99,813,000 $315,864 Source: Minnesota Department of Transportation, Office of Bridges and Structures #A-5: Cities are often required to contribute to Mn/DOT and county road/County State Aid Highway projects located within city limits. For some Minnesota cities, scarce funding that would otherwise be available for their own city streets or for the MSA system (for larger cities), is instead committed for the cities share for maintenance or improvements to the state or county roadways that are located within city borders. While none would doubt the value of these projects, the fact remains that city resources diverted to projects on road and bridges not part of the city owned systems hinders many cities in their efforts to address project needs on their own systems. Policy Options A number of policy options should be considered by the State Legislature in their efforts to provide Minnesota cities with the tools to meet their local transportation funding challenges. The following list of options would benefit any and all Minnesota cities. (For simplicity, these options are identified briefly here, and each is described in greater detail in Section 5 of the report.) Provide funding for a "Local Road Improvement Program" The principal purpose of the program would be to establish a pool of funding to support local road and bridge projects that would increase the capacity of the existing transportation system, but that do not benefit from the current funding structure. (A program designed to achieve these goals was passed by the 2002 legislature, but the funding was vetoed by the Governor.) (See Section 5, recommendation #1, page 40) Provide cities greater flexibility to generate revenues through special assessments. Enhancing the ability of Minnesota cities to impose special assessments for new construction or reconstruction would be helpful to many cities seeking to finance needed infrastructure improvements based on the "ability to pay" and "benefits received" principals. There may be some legal issues that could complicate implementation of these issues, but the Legislature should examine and consider making changes to provide cities greater authority. (See Section 5, recommendation #2, page 41) o Provide cities with additional local taxing authority, including the authority to establish a "Transportation Utility". Because of the limitations on special assessments, general fund appropriations and other potential funding sources, many cities are finding it increasingly difficult to develop a financing program to fund needed improvements and maintenance. Authorizing cities to finance transportation infrastructure by establishing a transportation utility would result in users of the system providing the additional revenue necessary to support its construction and/or maintenance. Other "user- based" funding sources could include local option fuel taxes or sales taxes on the price of fuel. (See Section 5, recommendation #3, page 42) 27 e Enact legislation authorizing cities to establish "Impact Fees". Since new industrial, commercial and residential developments all result in increasing demands on public infrastructure - including streets - it is reasonable to generate the revenues necessary to build and support these infrastructure improvements on those who create the need for them. Impact fees (and fee exemptions) could also be used as a policy tool to encourage regional growth patterns that are consistent with sound long range planning principles. (See Section 5 recommendation #4, page 43) 28 B. Locally Funded City Streets - Cities under 5,000 Minnesota's smaller cities - those with populations under 5,000 - are not eligible for any state aid funding for collector or arterial streets, regardless of the traffic volume that these streets support. In theory, the state distribution to the counties through the County State Aid Highway distribution is in part intended to support these roadways, however, in practice there is insufficient funds to finance all small city roadway needs. As a result, city owned roadways in these cities are classified as "municipal streets" in the terminology used by Mn/DOT, and are financed exclusively with revenue sources generated locally, which means the property tax. Findings #B-l: Most small cities are not spending enough on roadway capital improvements to maintain a 50 year life cycle. One of the principal goals of the 2002 City Road andBridge F~mding Survey was to assess the spending trends of Minnesota cities relative to the projected spending that would be required to sustain a life cycle of 50 years. In this report, we borrow from the methodology applied by Greg Isakson, the Goodhue County Engineer, who has established this analytical method for determining the life cycle needs of Minnesota's system of county roads. The survey returned data on 108 cities under 5,000 in population on the question of each city's spending level for the three principal roadway construction/maintenance activities discussed in this report: 1) construction/reconstruction (which implies initial grading or regrading the roadway surface) which occurs once in a 50 year life cycle; 2) overlaying the pre-existing surface (which we assume to occur twice in a 50 year life cycle) and 3) sealcoating the surface (which we assume to occur six times over the 50 year life cycle). Figure 27 presents a "typical" life cycle construction and maintenance activity schedule that would allow a paved roadway to last for 50 years. Figure 27 "Typical" 50 Year Life Cycle Roadway Construction and Maintenance Activity Schedule Activity Interval Year Construction 1 Sealcoat 2 3 Sealcoat 7 10 Overlay 7 17 Sealcoat 2 19 Sealcoat 7 26 Overlay 7 33 Sealcoat 2 35 Sealcoat 7 42 Regrade 7 49 To identify projected costs, the methodology applied in this analysis requires that a typical cost per mile be estimated for the three activities that comprise the construction and maintenance schedule. In this analysis, it is estimated that the per-mile cost of regrading is $200,000 per mile, the cost of an overlay is $40,000 per mile, and the cost of a sealcoat is $5,000 per mile. (These values are consistent with the cost estimates used in the county needs study and are on par with all of the cities who reported activity costs.) 29 Figure 28 shows the percentage and raw numbers from the surveyed cities who either met, or didn't meet the 50-year life cycle spending requirements for each of the three primary construction and maintenance activities. The data from the survey indicates that few cities under 5,000 in population are spending enough in their capital construction and maintenance programs over the last 5 years to maintain a 50-year life cycle on their city street systems Fioure 28 Percentage of Small Cities Meeting 50 Year Life Cycle Spending Levels Avg Spending 1997-2001 (108 Cities Surveyed) lEI Cities Not Meeting 50-Year Life Cycle Spending Needs iD Meeting L Cyc e Spend ng Needs Cities 50-Year fe 100% 90% 70% 71 .................. 60% ........... 81 95 50% 40% 30% 20% .... ~ .... ~7, ~ ............... ~ "~-~,, ,, !~<'~i~i~: -~- ComtmctioCReconstmcdon Oveday Sealcoat Source: 2002 City Road and Bridge Funding Survey #B-2: Most small cities don't have a regular, annual road budget. Unlike many of Minnesota's larger cities, the vast majority of smaller cities do not have sufficient revenue bases to afford the luxury of dedicating a regular portion of annual revenues to an ongoing, road construction and maintenance program. These cities will allocate funds to road maintenance and construction only when the priority exceeds other competing government services. The 2002 City Road and Bridge Funding Survey asked all cities to report on their capital road and bridge construction and maintenance activities, (including construction, reconstruction, overlay, and sealcoating) for the 5-year period from 1997 to 2001. Figure 29 shows that of the 108 cities under 5,000 in population who responded to the survey, 65 cities (or 60 percent) reported spending on roadway capital improvements in no more than 2 of the five years. 40 ~ 30 G 2O ~ 10 Figure 29 Mn. Cities Under 5,000 Number of Years from 1997-2001 with a Capital Road Improvement Budget (108 Cities Surveyed) 0 of 5 1 of 5 2 of 5 3 of 5 4 of 5 5 of 5 # Yrs w/Capital Budget This finding suggests that for these smaller cities, limited available resources prevent them from undertaking any permanent ongoing capital road improvement program. 30 #B-3: Small cities are heavily reliant on locally generated revenues. As described above, cities under 5,000 in population are not eligible to receive state aid through the MSA program. As a result, these cities are reliant primarily on their own resources to fund road and bridge construction and maintenance. Figure 30 shows data collected from the 2002 City Road and Bridge Funding Survey that illustrates small cities reliance on their own revenue sources. As indicated in the graph, for the 108 cities under 5,000 surveyed, for the years 1997 through 2001, the share of locally generated revenue has fallen in the range of 70 percent or higher. It should also be noted that the state share is shown at around 25 percent, but in reality, only a small number of cities receive significant amounts of state funding for specific projects. 00% 80% 60% 40% 20% 0% Figure 30 Estimated Distribution of Total Road and Bridge Funding Revenues to Minnesota Cities Under 5,000 (108 Cities Surveyed) Local Sources · Federal [] State [] County/Other Partnership 1997 1998 1999 2000 2001 Source: 2002 City Road and Bridge Funding Survey Most of the time, small cities receive little if any state funding. #B-4: On the whole, small cities don't receive significant resources from other local units of government for "shared" projects. Figure 30 also illustrates the fact that overall, small cities do not receive much financial support from the counties in which they are located for the costs of road and bridge improvements affecting county roads within city boundaries. According to the 2002 City Road and Bridge Funding Survey, only a small number of cities reported receiving support for the costs of improving arterial and/or collector streets within their city limits. Policy Options The following policy options should be considered to assist Minnesota's 724 cities with populations under 5,000 who are ineligible to receive Municipal State Aid. Provide funding for a "Local Road Improvement Program" The principal purpose of the program would be to establish a pool of funding to support local road and bridge projects that would increase the capacity of the existing transportation system, but that do not benefit from the current funding structure. (A program designed to achieve these goals was passed by the 2002 legislature, but the funding was vetoed by the Governor.) (See Section 5, recommendation #l, page 40) 2. Allocate a portion of the existing 5% special fund to cities under 5,000 population. Small cities are often at a disadvantage when it comes to competing for state or federal money to support local projects. Given their limited populations, it is sometimes difficult to attract funding for projects that will effect limited numbers of system users. Nevertheless, these cities often have needs that are critical for the safety and efficiency of their road and bridge networks. A special fund 31 e should be established that would provide funding specifically for the smaller cities. The program could be competitive and funded through the existing "flexible highway account" funded with five percent of Highway User Tax Distribution Fund revenues. (See Section 5, recommendation #5, page 43) Allocate a portion of the Motor Vehicle Sales Tax revenues to a special fund for cities under 5,000 population. A direct transfer of funds from the general fund to support transportation needs of communities under 5,000 in population is desirable if no new funding is provided as proposed in policy option #1, above; or if no existing transportation funding is dedicated to small cities as proposed in policy option #2, above. (See Section 5, recommendation #6, page 43) 32 C. Locally Funded City Streets - Cities over 5,000 As detailed above, there are 130 MSA eligible cities (those with a population of over 5,000) in Minnesota. Within these cities, 80% of the total roadway mileage, or about 10,750 miles, is classified as "municipal streets" in Mn/DOT terminology. Cities do not receive any state MSA for the construction and maintenance of these streets, so they are funded through locally generated funding sources, mostly property tax revenues. Findings #C-l: Most large cities are not spending enough on roadway capital improvements to maintain a 50 year life cycle One of the principal goals of the 2002 City Road and Bridge Funding Survey was to assess the spending trends of Minnesota cities relative to the projected spending that would be required to sustain a life cycle of 50 years. In this report, we borrow from the methodology applied by Greg Isakson, the Goodhue County Engineer, who has established this analytical method for determining the life cycle needs of Minnesota's system of county roads. The survey returned data on 32 cities with a population over 5,0000 on the question of each city's spending level for the three principal roadway construction/maintenance activities discussed in this report: construction/reconstruction (which implies initial grading or regrading the roadway surface) which occurs once in a 50 year life cycle; overlaying the pre-existing surface (which we assume to occur twice in a 50 year life cycle) and sealcoating the surface (which we assume to occur six times over the 50 year life cycle). The figure at right presents a "typical" life cycle construction and maintenance activity schedule that would allow a paved roadway to last for 50 years. Figure 31 "Typical" 50 Year Life Cycle Roadway Construction and Maintenance Activity Schedule Activity Interval Year Construction 1 Sealcoat 2 3 Sealcoat 7 10 Overlay 7 17 Sealcoat 2 19 Sealcoat 7 26 Overlay 7 33 Sealcoat 2 35 Sealcoat 7 42 Regrade 7 49 To identify projected costs, the methodology applied in this analysis requires that a typical cost per mile be estimated for the three activities that comprise the construction and maintenance schedule. In this analysis, it is estimated that the per-mile cost of regrading is $200,000 per mile, the cost of an overlay is $40,000 per mile, and the cost of a sealcoat is $5,000 per mile. (These values are consistent with the cost estimates used in the county needs study and are on par with all of the cities who reported activity costs.) Figure 32 shows the percentage and raw numbers from the surveyed cities who either met, or didn't meet the 50-year life cycle spending requirements for each of the three primary construction and maintenance activities. The data from the survey indicates that few cities under 5,000 in population are 100% 90% 80% 7O% 6O% 5O% 4O% 3O% 2O% 10% O% Figure 32 Percentage of Large Cities Meeting 50.Year Life Cycle Spending Levels: Avg Spending 1997-2001 (32 Cities Surveyed) [~ Cities Not Meeting 50-Year Life Cycle Spending Requirements Ll~l Cities Meeting 50-Year Life Cycle Spending Requirements Construction/Reconstruction Oveday Sealcoat 33 spending enough in their capital construction and maintenance programs over the last 5 years to maintain a 50-year life cycle on their city street systems #C-2: The funding gap in MSA eligible cities is more severe on the locally funded roads than on the state funded MSA system. There is a misconception among some people that the state provides MSA funding which supports most of the cost of a city's road maintenance and construction budget. It is important to remember that the MSA funds from the state support only 20 percent of roadways in the 130 eligible cities with populations over 5,000, as illustrated in Figure 33. Figure 33 Distribution of 2002 Minnesota MSA City Owned Roadway Mileage (Total MSA City Mileage: 13,565) MSA System vs. Municipal Streets 20.8% 2,817 mi According to the information provided in the 2002 City Road and Bridge Funding 79.2% Survey, these cities on average spend 10.748 mi. about 2.1 times more on capital costs on I" MSAMileage · Municipal Streets Mileage 1 their non-MSA roads compared to their MSA systems, however, the non-MSA systems have four times the mileage! This relationship is illustrated I Figure 34. F~g.re a4 Average Spending per Mile for Each of the 3 City Road Categories MSA System, Cities O~er 5,000 LocallyFunded City Streets, - Total Mileage 2,818 Cities Over 5,000 - Total Mileage 14,072 Locally Funded City Streets, Ci~es Under 5,000 - Total Mileage 1,703 Policy Options The following policy options should be considered to assist Minnesota's 130 cities over 5,000 in population to finance the 80% of their city street systems that are not eligible to receive state funding under the MSA program. Provide funding for a "Local Road Improvement Program" The principal purpose of the program would be to establish a pool of funding to support local road and bridge projects that would increase the capacity of the existing transportation system, but that do not benefit from the current funding structure. (A program designed to achieve these goals was passed by the 2002 legislature, but the funding was vetoed by the Governor.) (See Section 5, recommendation #1, page 40) Provide cities greater flexibility to generate revenues through special assessments. Enhancing the ability of Minnesota cities to impose special assessments for new construction or reconstruction would be helpful to many cities seeking to finance needed infrastructure improvements based on the "ability to pay" and "benefits received" principals. There may be some legal issues that could complicate implementation of these issues, but the Legislature should examine and consider making changes to provide cities greater authority. 34 o (See Section 5, recommendation #2, page 41) Provide cities with additional local taxing authority, including the authority to establish a "Transportation Utility". Because of the limitations on special assessments, general fund appropriations and other potential funding sources, many cities are finding it increasingly difficult to develop a financing program to fund needed improvements and maintenance. Authorizing cities to finance transportation infrastructure by establishing a transportation utility would result in users of the system providing the additional revenue necessary to support its construction and/or maintenance. Other "user- based" funding sources could include local option fuel taxes or sales taxes on the price of fuel. (See Section 5, recommendation #3, page 42) Enact legislation authorizing cities to establish "Impact Fees". Since new industrial, commercial and residential developments all result in increasing demands on public infrastructure - including streets - it is reasonable to generate the revenues necessary to build and support these infrastructure improvements on those who create the need for them. Impact fees (and fee exemptions) could also be used as a policy tool to encourage regional growth patterns that are consistent with sound long range planning principles. (See Section 5, recommendation #4, page 43) 35 D. State Funded City Streets - Cities Over 5,000 There have been a number of studies prepared in recent years that have thoroughly examined the funding adequacy of the system of state aid to qualifying cities through the Municipal State Aid funding formula, and also to Minnesota's 87 counties through the County State Aid Highway formula. Funding systems of these "major" local roadways have been the focus of these studies largely because they involve the distribution of state revenues from the Highway User Tax Distribution Fund. As indicated earlier, the emphasis in this report is on the city street systems that are not supported by state aid. However, to provide a complete assessment of city road and bridge needs, this section will briefly summarize some of the key findings relating to MSA system needs that have been identified in previous reports. The sponsors of this report generally support the notion that the MSA funding formula does not provide sufficient funding to fully support the construction and maintenance needs of the MSA system, and that funding increases would benefit those cities that are eligible to receive funding, i.e. the 130 cities over 5,000 in population. The fundamental issues involving the MSA system and the adequacy of MSA funding levels include the following: #D-l: The MSA system has grown much more rapidly since its inception 40 years ago than the state owned system or the county owned system over the same timeframe, yet the funding distribution has remained the same. Figure 35 shows the comparison of the expansion in the state maintained system (trunk highways and interstates), the County State Aid Highway system, and the Figure 35 Change in Roadway Miles: 1960 to 2002 System 1960-1961 2002 % Change Mn/DOT System (Trunk Highways and Interstate) 11,839 11,932 0.1% CSAH 29,101 30,385 4.4% MSA 1,142 2,818 146.8% Source: Mn/DOT State Aid to Local Transportation Group, and Mn/DOT Annual Reports Municipal State Aid system. As the table shows, mileage on the MSA system has expanded rapidly while the mileage on the other two systems has remained virtually constant. The problem lies in the fact that the constitutional distribution of Highway User Tax Distribution Fund revenues has been held at nine percent since the MSA system was established in the late 1950s. At that time, there were 58 MSA eligible cities. Today there are 130 MSA eligible cites that share the same nine percent distribution from the state Highway User Tax Distribution Fund. The growth in the number of eligible cities has led to the growth in the total eligible mileage, as presented in Figure 35. #D-2: Current MSA funding levels do not cover the full costs of improving these cities' MSA street systems. As described in Section 2 of this report, the state MSA system provides funding to eligible cities on the basis of two factors: population and needs. The population distribution, as one would expect is straightforward: half of the total allotment is distributed to eligible cities at the same proportion as their share of total population among the eligible cities. 36 The other half of the MSA allocation is based on a very complex, needs-based formula that takes into account system age, condition, and numerous other variables. This needs-based formula is intended to provide aid assuming a 25-year "construction needs" life cycle for the MSA system. The Mn/DOT State Aid for Local Transportation maintains detailed records documenting the needs of the MSA system, which is used as the basis of the needs based distribution. In order to assess the adequacy of the aid allotments, the 2002 City Road and Bridge Funding Survey collected data on 32 MSA eligible cities in order to allow a comparison of MSA revenues to the "annualized needs" computed by the Mn/DOT SALT group. Figure 36 32 MSA Survey Cities: Needs Compared to MSA Allotment iD Annualized needs exceed MSA average allotment 'i I MSA average allotment exceeds annualized needs 39% 61% When the average annual MSA allotment is compared to the annualized 25-Year construction needs of each polled city, 19 of 31 cities who reported their MSA revenues indicated that the average allotment since 1997 is less than their annualized 25-Year construction needs. This distribution is reflected in Figure 36. The fact that most cities receive MSA funding allotments that is insufficient to meet all MSA needs is also confirmed by Mn/DOT data that shows the average age of the MSA system aging. #D-3: MSA systems are being funded at a level that will result in a 53-year life cycle. Figure 37 Derivation of Life Cycle Estimate of MSA Construction / Reconstruction Total Average Annual Spending on Construction / Reconstruction of MSA System (1997-2001): 32 MSA $28.5 million Survey Cities Total MSA Mileage of 32 Responding Survey Cities 1,158.7 miles Estimated Cost per Mile to Construct / Reconstruct (1) $1.3 million Estimated total cost at $1.3 million/mile to reconstruct $1.506 billion entire MSA system of responding cities Estimated Number of Years to Construct / Reconstruct 52.8 years MSA System (2) i Notes: (1) The estimated cost per mile to construct or reconstruct MSA roadway mileage was derived by cost data provided in the survey, in which cities reported on the actual mileage constructed and the associated cost. The survey indicates that the average per mile costs were the following: 1997 - $1.1 million; 1998 - $1.0 million; 1999 - $1.I million; 2000 - $1.3 million; and 2001 - 1.5 million. Our analysis assumes an estimated cost of $1.3 million per mile. (2) The estimate is derived by dividing the estimated total cost per mile to reconstruct the entire MSA system of responding cities ($l .506 billion) by the total average annual spending on construction / reconstruction based on the results of the survey ($28.5 million). Most life cycle standards identify 40 years as the most cost effective life cycle for a paved road system such as those found on Minnesota' s MSA system. While no data is available to pinpoint the actual life expectancy of these roadways given existing funding trends, the survey taken for this report provides information to make an educated estimate. In a survey of 32 MSA cities, city engineers or staf£were asked to report on the total 37 spending on construction and reconstruction on its MSA system. ("Construction and reconstruction" was defined in the survey as including design and engineering costs, grading, signing, curb and gutter, storm sewer and sidewalks.) The survey found that the 32 cities spent a total of about $28.5 million per year between 1997 and 2001 to construct and reconstruct the MSA system. Since the total MSA mileage of the 32 responding cities is 1,158.7 miles and the average per mileage cost for construction and reconstruction is estimated at $1.3 million, the estimated cost to reconstruct the mileage of the 32 responding cities is $1.506 billion. Dividing that total need by the average annual investment over the last five years of $28.5 million means that the estimated number of years it would take to reconstruct the system is about 52.8 years. Policy Options 1. Increase the level of funding to the Municipal State Aid program. As described in Section 2 of this report, the Municipal State Aid program provides a total of roughly $120 million annually to the 130 Minnesota cities with populations over 5,000 to support about 2,800 miles of city roadways. While this amount has certainly been helpful to cities in their efforts to construct and maintain these eligible road systems, recent reports by Mn/DOT's State Aid for Local Transportation and other reports indicate that the MSA roadway surfaces continue to age and deteriorate. There are essentially just three options to increase revenues to MSA eligible cities by increasing revenue to the Highway User Tax Distribution Fund. They are: 1. Increase the gas tax from the 20 cents per gallon that was last increased 14 years ago in 1988. 2. Increase vehicle registration fees. 3. Provide other revenue growth to the Highway User Tax Distribution Fund, e.g. dedicate funds currently deposited into the General Fund, i.e. the Motor Vehicle Sales Tax. (See Section 5, recommendation #7, page 44) 38 Section 5: Recommendations The road and bridge infrastructure needs among Minnesota cities are as varied as the cities themselves. The 854 cities in Minnesota range in population from less than 100 to nearly 400,000, in size from a few acres to thousands of acres, from core cities to suburban cities to rural communities, from fully developed cities to rapidly expanding cities, from cities whose population more than doubled in the last decade to cities who continue to lose population, and from cities whose citizens are relatively satisfied with the "status quo" to cities whose citizens want "state of the art" services. Depending on its particular set of circumstances, a city may simply need to maintain its existing street system; it may simply need to upgrade a few rudimentary trails; or to convert them into a street system meeting current standards which includes multiple lanes, sophisticated traffic control systems, sidewalks, trails and other enhancements. Some rapidly developing cities have difficulty in funding the streets needed to serve new subdivisions, while others struggle to find a way to pay for development of their collector and arterial street system. Because of these many variables, various funding mechanisms may serve well for some cities while other cities are best served by a different set of funding mechanisms. Accordingly, a major goal of this study and report is to define the existing "tools" which are available to cities to provide funding for their street systems, to suggest ways in which those existing "tools" can be improved, and to suggest new "tools" which could be developed, so as to provide all cities with a more complete "toolbox" containing those tools which they can chose to use selectively in developing a funding system appropriate to their needs. Finding creative solutions to address the road and bridge infrastructure demands on Minnesota cities is especially critical given the states current fiscal condition. It is likely that aid to local governments that have supported - in part - transportation infrastructure in the past will not be a big part of the solution in the immediate future. Instead, policy makers should consider policy options that enhance accountability at the local level, and empower local policy makers to do what they feel is necessary to protect the capital asset that is their local road and bridge infrastructure. This report recommends the following seven solutions that should be adopted by state lawmakers. The emphasis on the recommendations presented here is on solutions that do not necessarily require any additional state funding. (Only recommendations itl and ii7 necessarily demand an increased commitment of state resources. All the others are intended to expand the options available to local government without exacerbating the state's fiscal shortfall.) Recommendations are not presented in order of priority, but rather it is hoped that consideration would be given to all of the recommendations. 39 1. Provide funding for a "Local Road Improvement Program." One idea that was considered in recent years is the idea of a "local road improvement program". The idea was initially proposed in 2001 by the Local Road Advisory Committee in a report entitled Legislative Study of State Funding for Local Road Improvements. This program, as it was originally conceived, would have provided a source of state funding to support the costs of construction on local road projects that do not benefit from the current financing structure. [Note: While the original bill passed by the Legislature would have provided significant assistance to some cities with special needs, the title of the program - the Local Road Improvement Program - is somewhat misleading since its focus was actually more limited than the title suggests. Therefore, it is important to recognize the need for the other options recommended in this report.] In meetings of the Local Road Advisory Committee, city and county officials identified numerous examples of situations where both the state and a local unit of government might benefit from special state assistance beyond currently available state aid. Ultimately, the Local Road Advisory Committee recommended that the state establish an account to assist cities facing unique circumstances arising from external demands. The 2002 Legislature received the report and adopted legislation as part of the 2002 bonding bill that would have placed $20 million into the account. Unfortunately, Governor Jesse Ventura line-item vetoed the funding for the measure, however, the structure of the program is in place and could be implemented if funding were provided. The purpose of the special Local Road Improvement Program would have been to provide funding assistance to cities and other local units of government for road construction or reconstruction projects with statewide or regional significance that cannot be funded through other revenue sources. Despite the demise of the provision in the 2002 Legislative Session, the need for this mechanism has not diminished. The sponsors of this report recommend that the funds be restored to the program. 2. Provide cities greater flexibility to generate revenues through special assessments. Two specific changes in the way that cities are able to use special assessments as a financing source for local road improvements should be adopted. First, as noted in Section 2, the courts have limited cities' ability to use special assessments to finance public improvements - including street improvements - to their ability to prove benefits to the property. Under current interpretation, "benefit" is interpreted to mean "the increase in market value of the property". While no specific remedy is proposed within this report, it is suggested that consideration be given to seeking a remedy to this issue. Second, in some cases the infrastructure improvements necessary to serve a new development must pass by or through proPerties which are not currently ready for development. Under the current law, a city may choose to defer special assessments for water lines, sanitary sewers and storm sewers against such properties until later, when those properties develop. However, the deferral of special assessments for street improvements is not allowed under the current law. It is recommended that legislation be adopted which allows a city to defer special assessments for street improvements in such situations. Another modification to the special assessment laws in Minnesota that would make the tool more useful for cities looking for additional funding options would be to give special assessments the same 4O tax treatment that local property taxes receive. Local property taxes are deductible, thus lowering state and local income tax burdens by reducing taxable income. The state has no authority to make special assessments tax deductible for federal income tax purposes, but they do have the authority to extend this tax deductibility to the state income tax code. 3. Provide cities with additional local taxing authority, including the authority to establish a "Transportation Utility". While all cities face major challenges in providing funding for street improvements and maintenance, mature cities must find ways to provide an appropriate level of maintenance and establish a cost- effective construction and reconstruction program. Because of the limitations of special assessments, general fund appropriations, and other potential funding sources, most of these cities find it extremely difficult to develop a financing program to fund the needed improvement and maintenance program. Accordingly, it is recommended that the legislature adopt legislation authorizing cities to levy local taxes dedicated for transportation infrastructure, including authority to establish a "Transportation Utility" if they so desire. A Transportation Utility is a system for raising money to support road and bridge maintenance and construction that is allocated to users based on the amount of traffic generated. The term "utility" is employed because it is similar to a storm water utility which allocates storm water drainage system costs to property owners based on the volume of storm runoff draining from their properties. Under a transportation utility, roadway users pay for roadway costs based on their use. Specific allocation systems can vary, however, the basic approach is to charge institutions based on the traffic they generate. Factors to consider include the number of employees, frequency of commute, and the availability of other traffic management strategies, such as subsidized mass transit, carpooling, etc... Like a storm water utility, a transportation utility could be adopted by individual municipalities. It could also be implemented on a regional or county basis. State enabling legislation should authorize but not mandate the use of this tool. Another option that would achieve the same result would be to grant the authority to local units of government to levy other local taxes. These tax revenues would' be dedicated to support the construction, reconstruction, and maintenance on roads and bridges within the local government that approves the tax. Other states currently allow cities to levy local fuel taxes or local sales taxes on fuel sold within their borders. 4. Enact legislation authorizing cities to establish "Impact Fees". In Minnesota - as in all states - new development leads to increasing demands for additional streets, utilities and other public infrastructure and services. Legislature- and voter-initiated limits on municipal budgets have only increased the pressure on local governments to find new ways to finance the infrastructure needed to serve new residential and commercial development. Impact fees are intended to place financial responsibility for new public facilities at least in part on those who create the need for them. Properly designed impact fees can be one of the most equitable solutions to a problem that may at times be insurmountable to local government. Accordingly, it is recommended that legislation be enacted which authorizes cities to adopt a system of impact fees, if they so choose. 41 Impact fees have been established in over half of the states, including Wisconsin. In Minnesota, the Supreme Court weighed in on the issue in the case of Country Joe vs. City of Eagan, identifying a number of specific standards that a city must meet in order to legally levy impact fees. This subject has been the focus of considerable planning efforts among Minnesota cities, who have considered procedures that ensure that the legislation can meet the standards defined by the Court. The sponsors of this report also suggest that in order to support regionally beneficial growth policies, cities could be authorized to waive impact fees as an incentive for new developments designed to address future growth and other changes in the region. 5. Allocate a portion of the existing 5% special fund to cities under 5,000 population. Another recommendation that would channel funds to small cities ineligible to receive any state aid funding is to allocate a portion of the "5% Special Fund (5% of the total HUTDF funds) to such a fund specifically targeted to smaller, non-MSA eligible cities. Because this fund is now distributed between the Flexible Highway Account and the Township Road and Bridge Fund, it would obviously be difficult to reduce the current funding level to those accounts. However, it is noted that any increase in gasoline taxes, license fees or the transfer of MVST funds to the HUTDF would result in an increase to the 5% Special Fund. Accordingly, it is suggested that a portion of that increase could be allotted to a new account for cities under 5,000 population. 6. Allocate a portion of the Motor Vehicle Sales Tax revenues to a special fund for cities under 5,000 population. The Constitutional amendment which established the MSA and CSAH programs envisioned a system in which counties assumed the jurisdiction of collector and arterial streets within cities under 5000 population, as well as the principal responsibility to improve and maintain those roads. CSAH rules also provide that counties must program their CSAH improvement program so that the allocation "earned" by the money needs of the cities under 5000 must be spent in those cities (collectively). Many counties have adopted policies and programs which implement that approach. However, for various reasons, some cities have not been able to obtain the needed improvements to their arterial and collector street systems. This factor was demonstrated in the 2001 Legislative Study of State Funding for Local Road Improvements, and in the 2002 legislation which proposed the creation of a "Local Road Improvement Fund". The direct appropriation of MVST funds for this purpose is suggested as an option in the event the more complete program proposed by that legislation is not adopted. 7. Increase the level of funding to the Municipal State Aid program. As described in Section 2 of this report, the Municipal State Aid program provides a total of roughly $120 million annually to the 130 Minnesota cities with populations over 5,000 to support about 2,800 miles of city roadways. The size of the MSA system continues to grow as more and more cities eclipse the 5,000 minimum population threshold, however, the base funding for the MSA system is determined by the state Constitution and remains at nine percent of total Highway User Tax Distribution Fund revenues. While state MSA allotments have certainly been helpful to cities in their efforts to construct and maintain these eligible road systems, recent reports by Mn/DOT's State Aid for Local Transportation and other reports indicate that the MSA roadway surfaces continue to age and deteriorate. 42 Since the distribution of MSA funding to Minnesota cities is determined by the state Constitution, nothing short of a Constitutional amendment to increase the share of Highway User Tax Distribution Funds to cities will increase the cities' share of the total pool. The only means of generating additional MSA revenues without amending the Constituion is to increase total HUTDF revenues. If the size of the MSA system is to continue to increase (which it is likely to do given demographic trends) then a reasonable response is to increase total MSA funding. There are essentially just three options to increase revenues to the Highway User Tax Distribution Fund. o Increase the gas tax from the 20 cents per gallon that was last increased 14 years ago in 1988. Increase vehicle registration fees ("tab fees") that were reduced under Governor Ventura's administration. Provide other revenue growth to the Highway User Tax Distribution Fund. The most likely candidate for increasing revenues to the fund would be by dedicating funds currently deposited into the General Fund, i.e. the Motor Vehicle Sales Tax. 43 Conclusion Few would dispute the notion that the condition of Minnesota's city streets and highways are an important aspect of the livability of the state. A quality local road and bridge network allows safe and easy access to schools, local businesses, recreational and cultural facilities, and family and friends. Just as importantly, sound local road networks enhance the economic development potential for businesses in the area, which results in higher employment, a stronger tax base, and other related benefits. Indeed, roads and bridges are typically the most valuable capital asset of a city, and like any asset, must be preserved. Cities have a financial obligation to both the past taxpayers who paid to develop the asset, and to future residents and users of the system who will rely on its use. The sponsors of this report recognize, however, that given Minnesota's current fiscal environment, city officials should not expect that the state will be in any position to address these funding challenges simply by providing significant new state resources. The state can, however, help cities to address the current and future funding shortfall by granting greater local revenue raising authority and by providing cities with additional tools to allow them to meet their specific needs. Providing cities with a more versatile "toolbox" to address their funding challenges will meet the principal objective of the cities (to protect the road and bridge capital asset) while addressing a fundamental fiscal policy goal of the state: to enhance the accountability of the system by aligning the responsibility for raising revenues with the level of government that is providing the service. The sponsors of this report are also hopeful that the findings identified herein will encourage state and local policy makers to examine and consider capital investment policies that would make the most efficient use of scarce resources as the demands on the road and bridge network increase in the future. With the new capital infrastructure reporting requirements known as GASB 34, there exists an opportunity for the state and local governments to work together to develop broad statewide pavement management guidelines that would maximize resources used to maintain local roads. These guidelines would be designed to ensure that proper preventative maintenance activities would take place, adding five to ten years to the life of existing pavement surfaces, resulting in significant cost savings over the life of the project. The City Engineers Association of Minnesota, the Minnesota Chapter of the American Public Works Association, and the League of Minnesota Cities look forward to working with state and local policy makers this year and in the future to solve these critical challenges. 44 Biblioeraphy 1. City of Bloomington. Pavement Management Program 2. lsakson, Greg. Goodhue County Engineer. Powerpoint presentation of county roadway needs, 50 year lifecycle. March 14, 2001. 3. League of Minnesota Cities. Handbook for Minnesota Cities, 1999. 4. Minnesota Department of Transportation. Draft Report: Moving Minnesota 2003, Moving People and Freight to 2023.Minnesota's 20 Year Transportation Plan. 5. Minnesota Department of Transportation, Statewide Transportation Improvement Program, 2001-2003. 6. Minnesota Department of Transportation, Office of Data Analysis and Information. ( Contact: Chuck Delisi) Reports on Roadway Mileage. 7. Minnesota Department of Transportation State Aid for Local Transportation Group. Draft Business Plan, August 2002. 8. Minnesota Department of Transportation State Aid for Local Transportation Group, Funding Minnesota's Networks of Roads and Bridges. November 2002. 9. Minnesota Department of Transportation State Aid for Local Transportation Group, Legislative Study of State Funding for Local Road Improvements. 2001. 10. Minnesota Department of Transportation. State Aid for Local Transportation, Municipal State Aid Needs Unit. 2002 Municipal State Aid Street Apportionment Data. 11. Municipal Screening Board. Report of the Needs Study and Allocation Study Subcommittee. October 28, 1997. 12. Office of the State Auditor. Reports on City Spending, 2000 and 1990. 13. Ohio Legislative Budget Office. Local Transportation Needs and Funding Report. September 1, 2000. 14. Spring Load Restrictions Task Force, Final Report. February 6, 2000. 45 Appendix 1 Cities over 5,000 surveyed Survey responses were provided from the following Minnesota cities with populations over 5,000: City City 2000 MSA Streets 2000 MSA Street ., City Pop. Mileage Miles City Pop. Mileage Miles Anoka 18,076 13.17 54.08 Maple Grove 50,365 35.87 167.77 Apple Valley 45,527 29.81 133.32 MendotaHeights 11,434 13.57 45.62 Austin 23,314 27.86 94.93 Minneapolis 382,618 203.39 764.88 Bloomington 85,172 75.67 291.44 Minnetonka 51,301 46.75 196.1 Buffalo 10,097 8.97 37.57 New Brighton 22,206 12.61 48.22 Duluth 86,918 111.09 332.11 New Hope 20,873 13.24 52.06 Eagan 63,557 33.26 175.96 Oakdale 26,653 18.07 108.73 East Bethel 10,941 20.25 86.7 Owatonna 22,434 18.38 85.8 Fairmont 10,889 18.64 55.17 Richfield 34,439 25.42 103.91 Falcon Heights 5,572 2.44 17.68 St. Cloud 59,107 51.83 114.73 Farmington 12,365 10.43 29.52 St. Louis Park 44,126 27.3 125.69 Fergus Falls 13,471 23.62 58.38 St. Paul 287,151 165.99 606.55 Fridley 27,449 24.81 82.41 St. Paul Park 5,070 5.37 21.79 Golden Valley 20,281 22.9 98.34 Thief River Falls 8,410 14.62 43.62 Ham Lake 12,710 23.12 72.61 West Saint Paul 19,405 13.39 43.3 Little Canada 9,771 10.64 17.5 Woodbury 46,463 36.22 158.26 46 Appendix 2 Small Cities under 5,000 Surveyed Survey responses were provided by the following 108 cities with populations under 5,000. Non MSA- Eligible Responding Cities (Population Under 5,000) City Street City Street City Population Miles City Population Miles Altura 417 3.01 Granada 317 2.72 Alvarado 371 2.70 Greenfield 2,544 29.64 Argyle 656 10.44 Grove City 608 4.90 Ashby 472 2.63 Hamburg 538 1.83 Barnesville 2,173 16.61 Hampton 434 2.36 Battle Lake 686 7.15 Hanley Falls 323 3.12 BirchwoodVillage 968 4.34 Hanover 1,355 6.93 Bird Island 1,195 11.06 Hanska 443 2.79 Bock 106 1.44 Hatfield 47 1.76 Bricelyn 379 4.17 Hazel Run 64 1.57 Browerville 735 6.76 Hilltop 766 .94 Cedar Mills 53 1.39 Iron Junction 93 1.32 Cold Spring 2,975 10.7 Jasper 597 5.46 Comstock 123 .84 Jeffers 396 5.62 C romewell 143 4.49 Kasson 4,398 14.78 DeGraff 133 2.31 Kelliher 294 5.33 Dellwood 1,033 11.68 Lafayette 529 4.80 Dumont 122 1.95 Lancaster 363 4.44 Erhard 150 1.17 Landfall 700 2.90 Fountain 343 2.35 LaPrairie 605 3.82 Frost 251 1.87 Leonard 29 1.76 Glenwood 2,594 22.27 Lester Prairie 1,377 5.08 Glyndon 1,049 4.94 Lexington 2,214 8.47 47 Non MSA- Eligible Responding Cities (Population Under 5,000) Cont'd City Stree~ City Street City Population Miles City Population Miles Loretto 570 1.95 Proctor 2,852 13.73 Lyle 566 5.17 Randolph 318 2.10 Lynd 346 1.85 Rockford 3,484 9.79 Madison Lake 837 4.34 Roosevelt 166 2.40 Manchester 81 .65 Rose Creek 354 2.37 Mahnomen 1,202 7.95 Rushford Village 714 8.47 Marine on St. Croi> 602 7.69 Sherbum 1,082 11.18 Maynard 388 5.05 Spicer 1,126 5.58 Mazeppa 778 7.05 Spring Park 1,717 2.78 Mclntosh 638 5.24 Springfield 2,215 15.70 Medina 4,005 39.60 St. Mary's Point 344 4.51 Melrose 3,091 18.95 St. Rosa 44 .25 Middle River 319 2.76 Stockton 682 3.45 Montgomery 2,794 11.92 Sunburg 110 1.00 Nashua 69 5.36 Taopi 93 1.44 New Auburn 488 4.92 Taunton 207 3.26 New Trier 116 1.07 Truman 1,259 8.20 Oak Park Heights 3,957 17.32 Underwood 319 3.18 Ogema 143 2.09 Vesta 339 3.99 Ogilvie 474 2.63 Villard 244 4.83 Okabena 185 2.32 Vining 68 4.30 Oronoc o 883 9.04 Wadena 4,294 32.61 Ortonville 2,158 17.71 Warba 183 4.10 Oslo 347 4.48 Warren 1,678 12.83 Osseo 2,434 13.48 Waverly 732 6.66 Palisade 118 1.74 Welcome 721 7.98 Paynesville 2,267 12.74 Wendell 177 1.98 Pelican Rapids 2,374 14.87 Westbrook 755 8.45 Pemberton 246 2.03 Willemie 549 3.43 Pierz 1,277 8.32 Willow River 309 5.42 Pine Springs 421 4.43 Wilton 186 4.82 48 Appendix 3 - Additional Local Revenue Tools Available to Minnesota Cities Cities have only a few tools at their disposal for financing street construction and maintenance. In addition to local general funds, property taxes, and special assessments, which were discussed in Section 2 of the report, cities can also utilize the following tools. For the most part, these tools are used rarely by the vast majority of Minnesota cites and represent a very small portion of total road and bridge funding. payments in lieu of special assessments This option allows a developer to pay for the costs of a specifically-defined set of improvements. This payment option does not require the city to prove financial benefits resulting from the improvements. Cities and developers have not been inclined to engage in these agreements. This tool may be limited to high-cost, nontraditional projects, and is not an option for reconstruction projects. Local bonding Cities obtain funds for most public improvement projects from bond issues. The city pays off the bonds as the funds become available through collection of special assessments and any taxes the city levied for that purpose. There are three kinds of bonds: · Improvement bonds allow a city to borrow dollars and repay them through special assessments and general taxing authority. · Improvement warrants do not have general taxing power and city fund backing, but are payable only from the assessments against the affected property owners. Few cities use improvement warrants because the bonds are more readily marketable at a lower rate of interest than improvement warrants. Temporary bonds allow a city to issue and sell temporary bonds at any time before completion of a public improvement project. These bonds mUst mature within three years. They are payable with improvement bonds the city must issue by the maturity of the temporary bonds. Temporary bonds allow cities to consolidate several improvement projects into a single bond issue. Also, the city reduces the chance of excessive borrowing by delaying the long-term bond issue until it knows the total project cost. Property tax abatements. Under MS § 469.18, cities may create a dedicated fund for improvements to specific properties. The abatement process is similar to the tax increment financing process (TIF) in that the city may place abated taxes into a special fund for the purpose of paying the costs for specified improvements which benefit the area for which the taxes are abated. This tool has limited applications; however, it can be a valuable mechanism for large projects associated with economic development initiatives. Enterprise funds. Certain city enterprises, such as municipal liquor profits, may provide additional income into the city's general fund. Under MS § 412.27, 412.141,426.20, 447.045 and 412.371, a city council can use these profits to fund infrastructure projects provided a public hearing is held to discuss the transfer of funds from the city's general fund. Not all cities operate enterprises, and in cases where a city does operate an enterprise, the enterprise may not generate significant profits. Infrastructure replacement reserve fund. Under MS § 471.572, a city council may create a fund by a two-thirds vote of all its members through ordinance or resolution, and may levy an annual property tax to support the fund. 49 Special taxing districts. Under Minnesota Statutes § 428A, cities are authorized to establish special service districts. Only public utility and commercial/industrial land is subject to service charges. Other types of property may be included in the district, but are not subject to the special taxes. The law stipulates that a petition of consent must be filed by 25 percent or more of the owners of the land area of property that would be subject to service charges. 50 Appendix 4 2002 City Road and Bridge Funding Survey II. Municipal State Aid (MSA) System: Historical Capital Spending: (If your city has a population under 5,000 it receives no Municipal State Aid. Skip ahead to Section III.) Please identif, the MSA roadway mileage completed each year and the amount spent on each road improvement activity for the last 5 years. 2001 2000 1999 1998 1997 Historical Spending Miles $ Miles $ Miles $ Miles $ Miles $ Street Construction and Reconstruction (See Note 1, below) Overlay Projects Sealcoating Projects Bridges Right-of-Way Acquisition City participation in CSAH or County Road Projects (See Note 2, below) Other Capital Expenditures (See Note 3, below) Total Spending Note 1' Note 2: Note 3: Please total all costs related to street construction and reconstruction projects including related administrative costs (i.e. legal and bonding costs), design and engineering costs, grading, signing, striping, curb and gutter work, storm sewer and sidewalks and non-recreational trails adjacent to roadway projects. Please do not include bridge and right-of-way acquisition or any other items identified separately in the survey. For this entry, please include only the city portion of MSA funds used on the County State Aid Highways or other county road systems. Please include all costs of"stand alone" projects not included elsewhere, such as streetlights, storm sewer construction, traffic signals, landscaping, and stand alone sidewalk and trail projects. III. City Streets: Historical Capital Spending Please identify the city street (non-MSA) roadway mileage completed each year and the amount spent on each roadway improvement activity for the last 5 years. 2001 2000 1999 1998 1997 Total Non-State Aid City Streets Historical Spending Miles $ Miles $ Miles $ Miles $ Miles $ Street Construction and Reconstruction (See Note 1, below) Overlay Projects Sealcoating Projects Bridges Right-of-Way Acquisition City participation in CSAH or County Road Projects (See Note 2, below) Other Capital Expenditures (See Note 3, below) Total Spending Note 1: Note 2: Note 3: Please total all costs related to street construction and reconstruction projects including related administrative costs (i.e. legal and bonding costs), design and engineering costs, grading, signing, striping, curb and gutter work, storm sewer and sidewalks and non-recreational trails adjacent to roadway projects. Please do not include bridge and right-of-way acquisition or any other items identified separately in the survey. For this entry, please include only the city portion of municipal street funds used on the County State Aid Highways or other county road systems. Please include all costs of"stand alone" projects not included elsewhere, such as streetlights, storm sewer construction, traffic signals, landscaping, and stand alone sidewalk and trail projects. IV. Operating / Maintenance Expenditures Please show your city's expenditures for Operation and Maintenance of all streets in your City for the past 5 years. DO NOT include any of the expenditures reported in sections II or III. Historical Spending for Operations and Maintenance on City Streets 2001 2000 1999 1998 1997 Operating / Maintenance $ $ $ $ $ Expenditures (See Note 1, below) Note 1' These expenditures should include ALL COSTS (including staff labor, contract labor and/or equipment, and materials costs) for Operation and Maintenance, including snowplowing, sweeping, striping, patching, signage, traffic signals, street lighting, and storm sewers. Also include maintenance of Public Works department vehicles. The amount entered for each year in this section should be the difference between the total annual costs for the street maintenance budget, and the amounts reported in each year reported for the MSA system (Section II), and the amount reported for non-MSA city streets (Section III). Remember to include al_!l operating costs related to street maintenance even if they are accounted for in a separate fund, such as separate accounts for street lighting, signal maintenance, vehicle maintenance, etc...or separate funds such as a Public Power and Light fund, a Storm Drainage Utility fund, etc... V. Revenue Sources for City Street Systems Please identify the annual amount of revenue received from all funding sources over the last 5 year for your city's municipal street construction and maintenance pfc gram. 2001 2000 1999 1998 1997 Federal Aid: State Aid: · Municipal State Aid · State Grants · Other General State Aids County Funds: I I Local/Own Source Revenues: · Municipal General Funds · Special Assessments · Developer Fees · Special Taxing Districts · Tax Increment Financing · Property Tax Abatements · Bonding · Cooperative Agreements · Storm Drainage Utilities · Street Light Utilities · Other (Please Specify) · Other (Please Specify) · Other (Please Specify) Total Resources VI. Other Funding Strategies Please describe any operational strategies that your city has employed to meet the roadway improvement needs o£ the city? (e.g. using cheaper materials, delaying less critical needs, etc...) 1. o VII. Anticipated Future Needs: System Expansion Please list and describe any expansion projects, (involving additional mileage, lane capacity) that your city anticipates in the next five years. What funding sources would most likely be used to finance the expansion projects? Please provide a rough estimate of the distribution of funding resources for each anticipated project.