The City budget will again be in the news as the Mayor presents her final
2001 budget recommendations to the City Council on Nov. 9th. We got her
initial presentation/recommendations on Aug. 8th, and since then the
"Priorities 2001" document has been prepared by City departments. On Oct.
13th, CM Barret Lane provided list members notice that the budget-related
"Priorities 2001" document and several other white papers prepared by several
departments in City government, were available on the City website. CM Lane
also provided answers to three budget questions I had posed in September
regarding the City budget.
I have reviewed CM Lane's information and much of the "Priorities 2001"
materials, including a white paper titled "Management of Stresses on City's
Limited Financial Resources Work Team Repot", authored by Steve Cramer (MCDA
Dir.) and John Moir (former Finance Dir.). I think it's important that Mpls.
residents review these city materials and give some thought to city-finance
issues prior to election day and the Mayors next budget round. I summarize
some highlights of City documents and offer some comments:
1. From the Cramer-Moir report, "...(in the case of) general purpose
resources (money that can be spent on any public purpose), current spending
levels on IT (info tech) Services and vehicular equipment exceed available
annual revenues. ...the situation is exacerbated by need to increase
spending on infrastructure consistent with the adopted 10-yr infrastructure
and public safety initiatives. Health care costs are escalating. The
general property tax base is increasingly limited by expanding TIF.
Presently, 41 percent of all new improvements to real estate and more than 15
percent of all the City's property tax capacity is inside TIF districts for
taxes payable in 2001. Water and sewer fees will continue to increase
decause of.. water treatment and flood mitigation program... The MCDA is
experiencing a decline in community development resources..., the funding of
the second phase of NRP combined with the escalating debt service on the Tax
Increment Revenue Bonds issued in 1990 absorb almost all funding available
for development projects... the potential default on the Brookfield Sacs Loan
could reduce MCDA resources in 2002."
2. In 1997 the City released a 200 page report on State of the Public
Infrastructure, concluding we were about $74 million behind in maintaining
our infrastructure, not including Parks and Libraries, or interest which
currently amounts to an additional $18 million! The City Council chose to
eliminate half the gap over five years using pay-as-you-go financing, thus
avoiding added debt (as referenced in CM Lane's mpls.issues post of 9/13.
There is currently kind of a undefined 'beg, borrow and steal' strategy in
place to accomplish the task, which requires significant increases in funding
each year. Don't rob Peter to pay Paul. Stick to the GAP financing debt
reduction plan.
3. What of the deficit in internal services funds? As CM Lane indicated
(9/13), the internal services funds account for financing goods/services
provided by one department to another, on a reimbursement basis. And, as
Barret said, "it became like a huge accounts receivable problem." That
'problem" amounted to over $32 million in 1999. The 2001 budget proposes
allocating $2 million toward reducing the deficit, and suggests another $2
million in cost reductions, in an attempt to slow the growth of the deficit.
"Artificially low internal service rates allowed the City to meet other
external (General Fund) service priorities without forcing reductions to pay
for cars, trucks, and computer equipment, etc. Thus, the demand for property
tax levy has been understated." (2000 Interim report, p.9) CM Lane notes
(post of 9/13), "One fund deficit (Equipment fund) is so large that it
accrues additional interest charges of almost $1 million per year. This
total cash deficit is projected to be $45 million by year-end 2001".
"ultimately, this debt is a financial obligation of the taxpayers of the
City..." (2000 Interim Report). And $2 million is allocated to remedy the
situation in the proposed 2001 budget!!
As I understand the Internal Services Workout Plan (per Lanes list post of
9/28), over $43 million dollars will be required from now through 2008, plus
over $19 million in bond interest charges. (or a like amount in tax
increases?) Unless resolved, the Internal Service Fund problem "could result
in the loss of the triple-A bond rating and service impact for those who pay
taxes, rates and fees to the City...(2000 Interim Report)
4. The City has a $7 million over-obligation of federal CDBG (community
development bloc grant) funds, which is risky since those funds aren't
assured in the future by the federal government. If the feds
reduce/eliminate levels of CDBG funding, that over-obligation becomes a
taxpayer responsibility. Activities/services funded by this source of
revenue should be examined and operating budgets severly cut back in an
effort to get spending back on track with revenues!
5. Returning to the Cramer-Moir report, "...municipal government cannot
provide the lead for funding a serious response to the affordable housing
issue... Residential homes and apartments will see an increase in property
taxes (with or without increases in property taxes levied)... construction of
new office towers has created an increasing vacancy rate in existing
towers... resulting in a seven percent decline in the tax value of existing
towers... most new towers are inside TIF districts and have been captured to
fund various development activities and projects... the values of apartments
and residential homes are rising dramatically and faster than the value of
commercial property... (and their) tax burden... will be increased for 2001.
Regressive taxes and user fees have no relationship to the citizen's ability
to pay... (and) impose a practical limitation on the ability to finance
municipal services in the long run."
6. As part of the "Priorities 2001" document, city departments defined their
business and identified major challenges they face. The Finance Department
projects that the office vacancy rate will increase to 20 percent within the
next two years (due to reasons discusses above), resulting in "large tax
assessments for residential property owners." This is their #1 challenge,
and they conclude that this challenge directly impacts all city goals. Their
#2 challenge questions the viability of the MCDA, and they indicate it won't
be financially viable in 3-5 years without some type of
reorganization/reinvention because of rapidly rising debt service on '90 bond
issues, the potential default on the Sacs Gavidae project, and the reduced
the reduced tax increment revenues attributable to increasing vacancy rates
in commercial towers. They predict the MCDA will see substantial reductions
in revenue/spending and/or seek increases in the property tax levy-- "further
exacerbating the property tax shift from commercial to residential and
apartment property." They believe a workout strategy is needed to salvage
the MCDA. Their #3 challenge involves the need for new technology and
qualified employees in the competitive job market.
MCDA also defined their business and major challenges as part of the
"Priorities 2001" document. Their #1 challenge is meeting their growing
demands while the availability of discretionary funds remains tenuous. They
complain about state restrictions on tax increment financing making it "less
usable" for many of their activities. Thank God! Their #2 challenge is the
need for thousands of units of affordable housing in the region and in
Minneapolis. They tout the failure of private and public sectors to provide
for our disadvantaged neighbors. Their #3 challenge deals with extending the
benefits of our growing economy to our most disadvantaged citizens... and
their concern for economic justice. Tell me, is this a city department
operating on regressive public tax dollars or a public charity seeking
contributions?
[Public Works' challenges involve infrastructure, litter and graffiti,
facilities and fleet and workforce planning. City Planning worries about the
comprehensive plan, zoning and workforce planning. The Police Departments
challenges include effectively delivering public safety services, staffing,
facilities, budget cuts, technology, and the growth in the chronic offender
population over the next decade. No explicit mention of conventions and
crowd control- probably covered under a discretionary budget fund]
I think it's time to rein-in the MCDA/City Council and limit their
use/expansion of tax increment financing and TIF districts and projects in
Mpls. Some type of flex-cap should be placed on the use of TIF$ on a
per-project basis, as well as an annual basis (maybe use a 'five year rolling
average'). For developers, it has become an expected part of doing business
in Mpls. Enough is enough!
7. The Cramer-Moir report discusses the challenge facing the City and it's
development agency as "how to maintain balance in the allocation of scarce
financial resources between development activities and other city services
(i.e. public safety and infrastructure). The challenge is complicated
further by the request of the Park and Recreation Board (MPRB) and Library
Board to increase spending for operations and capital improvements." And,
the report recomends phasing in property tax increases for the school
referendum over 5-8 years, for the Park Board over 4 years, and for the
Libraries over 5 years-- more smoke and mirrors that won't fool anyone.
Neither of the referendum groups includes the cost of inflated property
values in future years in their 'tax-impact analysis' on property owners over
the life of the bond issue-- eight years for the MPS and 25 years for the
MPRB. What is the projected value of your home 5, 8 or 20 years from now,
and how will the tax levy apply to those future property valuations relative
to todays value? Granted, the MPS referendum is largely just a continuation
of an existing tax-- but the future value analysis remains valid, especially
if you are near retirement. And a tax is a tax. Property taxes cannot
escalate at growing rates indefinately, yet that is the prognosis.
CM Lane points out that "the 2001 Budget forecast identifies balancing the
property-tax supported funds of the City as a 'major challenge' for the 2001
Budget." In fact, there is on ongoing 'order-of-magnitude' gap between
revenues and expenditures in the $15-$25 million range, each and every year
from here to 2010 (Prelim. Budget).
If the City does indeed own Meadowbrook Golf Course in St. Louis Park, the
City Council should sell it and invest the proceeds in a trust fund that
would provide annual revenues indefinately for prudent pay-as-you-go
projects, and to pay down debt. Leverage its value in the meantime as a sale
is negotiated. If neighborhoods are having difficulty spending their NRP
funds, reclaim it for debt reduction and Public Works infrastructure projects
in thay neighborhood, working with the legislature to get such authority
codified if necessary. Some neighborhoods sit on their NRP funds arguing for
years on what to do with it-- it's ridiculous. If it's that tough to figure
out what to do with it, they don't need it!
8. The Cramer-Moir report continues, "Local sales taxes pay for the
construction, operations, maintenance, and promotion of the Convention
Center. Property taxes and event parking revenues pay for the acquisition
and maintenance of the Target Center."
The GMCVA (Convention/Visitors Assoc) is seeking an additional one cent
increase on the hotel tax and wants city support at the state, with noted
support from the Hotal Association. The liquor/hotel/sales tax downtown is
already too high and keeps locals from using downtown for dining and
entertainment relative to suburban locations with lower taxes, plenty of
theaters and free parking. And with all this promotion, what do we end up
with but a police battle zone to protect against convention protests to the
tune of over a million dollars for a single event. Reduce those
tax-supported promotional subsidies and let the hotels and restaurants
support those efforts through their trade associations-- after all the
tourism is in their best interests.
9. Cramer-Moir offer options/strategies to mitigate increases in property
taxes, which include reducing the amount of annual increases for both
infrastructure projects and infrastructure maintenance debt reduction
programs-- more of the same formula that got us in trouble in the first
place. I expect this will be a popular option for many however.
They recommend MCDA negotiates a workout plan with Brookfield on the Sacs
loan and a pre-payment of their Nieman Marcus loan, as well as leveraging NRP
funds for needed projects and affordable housing. Leveraging NRP funds is a
good option but won't get a lot of support in the neighborhoods.
They suggest increasing annual revenues through asset sales, and reducing or
eliminating tax-exempt events at Target Center; changing to a lower cost,
single plan health care provider and increasing deductibles paid by
employees. They suggest seeking increases in state and federal funding of
various types; including getting rid of the requirement to pay state sales
tax on city purchases; decertifying TIF districts on schedule or earlier to
grow the general tax base, and continuing the debt reduction program... among
others. How about looking at applying a property tax to some large
non-profit properties or exempt religious properties not used for worship?
Is this possible?
10. CM Lane recently posted here about an article in Bond Buyer stating that
Moody's had placed a negative outlook on Indianapolis' Aaa GO (general
obligation) bond rating. The article said "the Moody's report noted that
Indianapolis had a $16 million deficit in its 2001 budget and a $13 million
shortfall in its police and fire pension fund. The city will make up its
budget deficit from its reserve fund. [A Moody's analyst] said future credit
quality could be undermined by
further reserve draw-downs after 2001. . . ." Sound familiar?
More recently (10/23), Mr. Wally Swan, Chair of the Mpls. Board of Estimate
and Taxation posted information here on mpls.issues from Standard and Poor's
"Public Finance" (Jan. 10, 2000), stating that the average net debt per
capita for 32 AAA rated cities is $1,750, noting some latitude is allowed
for rating factors such as population, strength/effectiveness of city
managers, economic diversity, etc. He also noted that the direct
indebtedness per capita for GO bonding in Mpls. will be $2,948 at year-end
2000 (aggregate debt of $1,131,118,438). Mr. Swan goes on to compare Mpls.'
GO debt plus the $140 million Library referendum debt to the Hennepin County
GO debt of $1,610,553,000 (Fitch 7/29/99), noting Hennepin County has roughly
three times the population of the city of Minneapolis. In private
correspondence, Mr. Swan went on to compare other cities of comparable size
to Minneapolis (using 1/10/00 data for consistency, when Mpls. net GO debt
stood at $2,681):
Columbus Ohio pop 635,913 per capita debt of
$2,121
Indianapolis, Indiana 731,321
$1,537
Charlotte, N. Carolina 504,637
$2,131
Omaha, Nebraska 371,291
840
Dallas, Texas 1,075,894
$1,211
and noted that only three of the 32 AAA rated cities exceeded the Minneapolis
figure in January, 2000.
If Mpls. looses its AAA rating, borrowing costs will increase, further
jeopardizing tax payers ability to remain in their home or in the city. In a
1999 study, The Greater Mpls. Building Owners and Managers did a study on
real estate taxes and found that the Wells Fargo Center paid significantly
more in property taxes than similar landmark centers in other cities around
the county ('Taken Together, tax proposals hurt', Strib, A27, 10/28/00)
Wells Fargo paid $9.12 per sq. ft. versus $7.18 in Boston, $3.38 in
Milwaukee, $2.48 in Dallas, $2.41 in Atlanta, $1.93 in Seattle and $1.68 in
Denver for similar properties. Wells Fargo expects to soon see a $1.00
reduction however, due to a lower valuation, anticipating a higher vacancy
rate due to new office construction. This does not represent a competitive
situation in a city that confesses to worry about future economic growth, job
growth and affordable housing. Hennepin county is also proposing a 4.74
percent increase in its property taxes, which will be amplified by higher
property values.
11. We have been on a long term spending spree in Minneapolis; adding debt,
much of it under the guise of TIF projects of highly questionable value that
result in tax revenues not being available to the general fund for 15-25
years, so long as the project doesn't fail. Poor city budgeting practices
have resulted in tens of millions of dollars in deficit accounts and tens of
millions more in accruing interest charges. City departments are continually
getting their budgets cut, and see no budgetary increases to account for
inflation. All these budget cuts amount to cuts in levels of basic services
and new or increased fees for services. We can't afford anymore feel-good,
politically rousing and morale-building jive talk and jive budgets. The city
government in all its glory, can't be all things for all people-- it's not
economically feasible. It is time to forget adding new services at the
expense of basic services. Its time to take care of business, improve
efficiencies and provide quality basic services, and actively reduce our debt
load.
I apologize for the extensive length of this post, although it's not a small
topic. Comments/suggestions/ideas welcome!
M. Hohmann
13th ward
