2006-08-08A,ITY OF MOUND MISSION STATEMENT: The City of Mound, through teamwork and cooperation, provides at a reasonable
Est uali services that res and to the needs of all citizens' fosterin a safe, attractive and flourishing community.
9 ~' p o
~_;. , _, r _. , ~ 7~ b _. .. _ ..
AGENDA
:~" ~ `~OUNG1~ ;... TLTESDA~~, AUGUST 8; 2006 7 00 P ,
~ i[':~I~1G(~3'ORK~HOP l~~iO.UND.CITX.COLNCIL°~HA.NTBER,~
.,_
:, ~ ,: - _
1. Call meeting to order
2. Discussion on 2007 Proposed Budget
3. Adjourn
Page #
1-92
This is a preliminary agenda and subject to change. The Council will set a final agenda at the meeting. More current meeting
agendas may be viewed at City Hall or at the City of Mound web site: www.cityofmound.com.
1
l
PLEASE TURN OFF ALL CELL PHONES & PAGERS IN COUNCIL CHAMBERS.
ABDO
EICK &
Y'`?t`t?zj J r'Y+t.t!' .1(XY3lt1)dlllifi 4~' {,~?'N7-~7£~dt•ZttE-S
S«(}t E;rle)a ~trrxur
4ui1r^ :37C)
Honorable Mayor and Council
City of Mound
Mound, Minnesota
August 3, 2006
I met with Kandis Hanson and Gino Businaro on August 1, 2006 to discuss some planning items for the 2006 audit. During our
meeting we discussed appropriate reserve levels for the City's General fund. In our 2005 management letter, we mentioned that
the undesignated portion of the 2005 fund balance was 25 percent of planned expenditures based on the 2006 budget. It is my
understanding that the 2007 budget may leave the reserve levels for the undesignated portion of fund balance below 20 percent.
This is a very low reserve level and some further analysis and planning should be considered.
The General fund balance has three components and they are summarized below:
Reserved for debt
Designated for park and severance
Undesignated
Total
Following years budget
Percent Percent
2004 of Total 2005 of Total
$ 381,830 8.71 % $ 389,140 8.16
338,380 7.72 387,903 8.14
1,399,299 31.92 1,195,002 25.07
$ 2,119,509 48.34 % $ 1,972,045 41.37
$ 4,384,370 $ 4,766,770
The amounts that are reserved or designated are not intended to be available for working capital. The League of Minnesota Cities
and the Office of the State Auditor recommend designating funds for working capital in amounts sufficient to meet the operating
expenses for the first half of the next fiscal year. Given this recommendation, it is important that the City base its working capital
target on the undesignated portion of fund balance. The amount of undesignated fund balance has decreased in total and on a
percentage basis from 2004 to 2005 (the last years of audited information). This has led to very little cushion at the City's cash
low point.
t)a`«.t~i;`r s)t~)i,7 ~ 1^uk `352.~3:i;i 3`ldal
~w w.:~r~nri:~r°s.~vern
_1_
City of Mound
August 3, 2006
Page Two
We have provided a graphical presentation of the monthly cash balances in the General fund for 2005 and 2006 (the most current
cash balance information) below: '
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$-
Z
~ ~ 6 ~ ~ ~ ~
Monthly General Fund Undesignated Cash Balances 2006
$1,400,000
$l,zoo,ooo
$l,ooo,ooo
$soo,ooo
$600,000
$400,000
$200,000
$-
':ts'~.Y,.l',{ <ltl?Jt7 • Hitt. 357.S.',ii.;iY.(~rt
{t'H'lti.slt'li'i(;IRit1,t'tl:7fEI
. P1 .
Monthly General Fund Cash Balances 2005
~ ~ ~ ~ ~ ~ ~
City of Mound
August 3, 2006
Page Two
The City's low point for the first half of the year has occurred in May for the last several years. The balance at May 31, 2006 was
$153,017. This is a decrease of $125,065 from the May 31, 2005 balance of $278,082. If the City continues to reduce the
unreserved fund balance at this rate it will almost be negative at May 31, 2007. The City has very little cushion for working
capital and nothing designated for emergency needs or unplanned expenditures. We recommend that the City Council consider
this declining undesignated portion of fund balance when planning for the 2007 budget. We believe that a higher fund balance
designated for working capital could be set. Based on the trends in the graphs, a 30 to 35 percent undesignated target would
provide more cushion for working capital and emergency needs. The City would need to add an additional $200,000 to $500,000
to reach 30 to 35 percent of planned expenditures. Implementation of this target could occur over several years.
We appreciate the opportunity to be of service to the City and if you have any questions, please let us know.
Sincerely,
ABDO, SICK & MEYERS, LLP
Certified Public Accountants & Consultants
~~~~~~
Steven R. McDonald, CPA
Managing Partner
~3;x`3.kE:}:r~r(N)it + ~i~x"):il.l~:ii„9.>t~a
\Y Vti 4v.'rll`Yi9('~)[t+.l `St(it
-3-
~,
5341 MAYWOOD ROAD
MOUND, MN 55364-1687
PH: (952) 472-0600
FAX: (952)472-0620
WEB: www.cityofmound.com
MEMO
To: Mayor and Council
From: Kandis Hanson
Gino Businaro
Re: Year 2007 Levy and Budget
Date: August 3, 2006
Once again we embark on a most difficult task-the 2007 Budget. Per your request, we are
presenting to you a Budget and Levy proposal early in the budget process, so that you have the
opportunity to give us direction primarily in the area of the Levy and the General Fund Balance.
We will schedule additional meetings to review this budget in more detail before, if desired, and
definitely after the preliminary numbers are certified to the County.
Enclosed please find a draft of the main pages relating to the General Fund and the Levy. Here
is information that will help you in your analysis:
General Fund
• The General Fund Levy is being set at a level equal to the amount necessary to have a
balanced budget.
• The specific amount of Current ad Valorem Taxes is 95% of the levy, less the amount
paid by the State in Market Value Homestead Credit.
• The Fiscal Disparity Distribution is not available at this time. We are using last year
amount for now.
• State Aid for Streets is being split between the General Fund and the Seal Coat Fund.
• Building Permits and related fees are coming in way below the 2006 projection and we
are hoping that $150,000 will be achievable in 2007.
• Plan Checks also are not coming in at the 2007 projected rate. We think that $70,000 is
on the optimistic side for 2007.
• Court Fines are coming in way lower than projected for 2006.
• Interest on Investment is tied to cash flow and the market.
• Proceeds from the Sale of Bonds is proportionate to Capital purchases in the Police,
Street and Parks Departments.
• The Finance Department budget increase reflects the addition of the Senior Accountant
for a full year vs. part of the year in 2006.
printed on recycled paper
-4-
• Promotions reflect additional dollars for special events.
• The Cemetery budget includes $2,800 for other improvements.
• The reduction in contingencies reflects a rainy day amount of $15,000 instead of the
usual $25,000.
• The increase in transfers is due to the Mound share toward fire services based on the new
formula approved by the Council earlier this year.
• The audit cost was increased by 3% and the administrative/computer costs by 5%.
• The general liability insurance was increased by 5% and workers comp by 15%.
• Health insurance was increased by 16%, dental insurance by 40%, LTD by 3% and Life
Insurance by 3%.
• Salaries were adjusted by 3% cost of living, based on already-settled labor contracts plus
steps for employees who are making their way to the top of their salary scale.
• The 18.58% General Fund Balance is the result of the assumptions given above.
Your direction on this item is one of two critical orders of business to be achieved at this
meeting.
Levy:
• The 16.25% Levy for General Purposes was used to show what increase is needed to
generate enough revenues to be equal to the proposed expenditures. All other levies are
--. required by the bond schedule or by other binding commitments.
• The Mound HRA levy of $173,760 is based on levy authority per Statute and Council
decision to use the money for the Transit Parking Deck.
• The Fiscal Disparity amount used is the same of last year for now.
• It is too early for us to get numbers from the County to calculate the tax rate and the
impact of that rate to the various property values.
Your direction on this item is the second critical order of business to be achieved at this meeting.
The detailed budget pages for each department and all other funds will by distributed once
direction is received from the City Council and priorities can be applied to the budget.
If you have questions about these materials or need other specific information, please us in
advance so that we can research it for you prior to the Aug 8 meeting. Our meeting time is
limited and we are hoping to glean from Council Members as much direction as possible so we
can return with an acceptable preliminary budget.
With all of us working together, we are sure that we will have a satisfactory preliminary budget
in September and a final budget in December that you will be willing to support.
-5-
~,
5341 MAYWOOD ROAD
MOUND, MN 55364-1687
PH: (952) 472-0600
FAX: (952)472-0620
WEB: www.cityofmound.com
MEMO
To: Mayor and Council
From: Kandis Hanson
Gino Businaro
Re: Programming - 2007 Budget
Date: August 3, 2006
Our charge as City officials is to provide for the health, safety and welfare of the citizens. That
generally means provide for the basic needs. Other services beyond that scope can be thought of
as enhancements to quality of life and can oftentimes be reduced or eliminated. With that in
mind, Council Members are asked to think in terms. of "programs" when you think of reducing
the budget. You may ask yourself: What programs are non-essential and can be curtailed or
eliminated to reduce the budget with the least amount of impact to the citizens? You could
consider the following programs for cutback:
--designate several parks as natural, eliminating their mowing
--review status of green spaces, to determine other possible uses, including sale to the public,
cutting back on maintenance demands plus adding revenues
--increase the time between grass and weed trimming citywide
--beach maintenance
--beach and park weed spraying
--port-a-potties in parks
--skate park contribution
--lifeguards
--contribution in money and in-kind to the Gillespie Center ,
--garbage pickup downtown
--CBD parking program, and the corresponding services
--phase out City involvement in redevelopment
--garden maintenance of Greenway, Streetscape, Public Safety Facility, new pump house
--weed spraying on sidewalks and roadsides
--street sweeping frequency
--striping of crosswalks and parking lots
--sidewalk repair
--pothole repair
--seal coating
--snowplowing 3:30 p.m. to 7:00 a.m. and on weekends (overtime)
®printed on recycled paper
-6-
--snow removal from sidewalks
--snowplowing only after 4" accumulation
--signage repair, replacement and additions
--tree trimming in the ROW
--Operation Clean Sweep and other nuisance abatement
--Recycling Program
--crime prevention activities
--events (supplies and labor, esp overtime)
-Spirit of the Lakes Festival contribution and support
-Music in the Park contribution and preparation
-National Night Out
-ribbon cuttings
-ground breakings
-other unplanned events (i.e., Scherven Park Dedication, Skate Park Ribbon
Cutting, 911 Remembrance, Frank Weiland Park Dedication, Andrews Sisters Trail
dedication)
--PD response to car lockouts
--PD response to property damage accidents
--police programs, such as Triad or others (eliminating an officer)
--close City Hall one day per week (10 hour days), reducing utilities
--close the cemetery
--close the Depot
--newsletter frequency or elimination
--Homestead processing at City Hall
--annual employee picnic
--memberships, dues and subscriptions
-7-
GENERAL FUND
SUMMARY OF REVENUES AND EXPENDITURES
2004 2005 2006 2007 2007
ACTUAL ACTUAL APPROVED REQUESTED PROPOSED
REVENUE
GENERAL PROPERTY TAXES 2,294,529 2,888,834 2,805,435 3,296,131 3,296,131 17.49%
INTERGOVERNMENTAL REVENUE 380,357 346,706 342,060 342,060 342,060 0.00%
LICENSES 21,645 19,220 19;550 20,150 20,150 3.07%
NON-BUSINESS LICENSES &
- PERMITS 278,237 226,283 285,300 253,300 253,300 -11.22%
GENERAL GOVT. CHARGES 481,179 499,988 485,600 494,000. 494,000 1.73%
OTHER REVENUE 338,870 365,135 310,500 334,000 334,000 7.57%
INTERFUND TRANSFERSBONDS x93.716 293.645 297.000 242.000 42 2.000 -18.52%
TOTAL REVENUE 4.288.533 64. 39.811. 4.545.445 4.981.641 4 ..981.641 9.60%
EXPENDITURES
CITY COUNCIL 74,466 77,172 82,450 88,445 88,440 7.27%
PROMOTIONS- 3,750 3,750 5,250 11,000 8,250 57.14%
CABLE T.V. 41,976 42,141 45,000 43,000 43,000 -4.44%
CITY MANAGER/CLERK 275,725 290,935 309,51.0 338,056 338,050 9.22%
ELECTIONS & REGISTRATION 12,135 435 20,600 2,850 2,850
ASSESSING 78,759 84,359 86,250 87,350 87,350 1.28%
FINANCE 225,064 244,696 296,970 362,475 362,470 22.06%
COMPUTER 24,584 18,647 13,950 15,050 15,050 7.89%
LEGAL 141,743 130,772 163,440 135,462 135,460 -17.12%
s POLICE 1,452,018 1,581,701 1,468,550 1.,565,459 1,565,470 6.60°k
EMERGENCY PREPAREDNESS 6,851 6,071 7,100 7,100 7,100 0.00%
PLANNING & INSPECTION 304,558 381,398 432,780 437,026 437,020 0.98%
STREET 1,020,902 937,728 911,920 955,667 955,660 4.80%
CITY HALL BLDG & SRVS 128,260 98,193 118,070 112,369 112,370 -4.83%
JANITORIAL SERVICES 0 0 0 47,155 0
PARKS 445,955 384,392 491,870 475,937 475,930 -3.24%
CEMETERY 9,210 7,641 10,447 13,247 13,250 26.83%
RECREATION 0 3,000 0 10,000 10,000
CONTINGENCIES 14,501 28,773 30,000 26,700 16,700 -44.33%
TRANSFERS 415.768 475.216 272 306.790 306.790 12.42%
TOTAL EXPENDITURES 4.676.225 4.797.020 4.767.047 5.041.138 4.981.210 4.49%
INCREASE (DECREASE) (387,692) (157,209) (221,602) (59,497) 431 -100.19%
FUND BALANCE, JANUARY 1 1,422,542 1,340,889 1,164,760 925,032 925,032 -20.58%
ADJUSTMENT TO AUDIT 306.039 37 0 6
FUND BALANCE, DECEMBER 31 1 4 1 14. 6.634 49 3.158 865.535 925.463 -1.88%
FUND BALANCE AS A PERCENTAGE
OF EXPENDITURES: 28.67% 23.90% 19.78% 17.17% 18.58%
NOTE: UNDESIGNATED ONLY IS PART OF FUND BALANCE.
-$-
CITY OF MOUND
TAX LEVY RECAP
TAX LEVIES
REVENUE -GENERAL PURPOSES
REVENUE -LEASE PAYMENTS
2001A JUDGMENT BOND
FIRE RELIEF
G.O. IMPROVEMENT 2001 C
G.O. IMPROVEMENT 2003A
G.O. TAX INCREMENT 2003C
G.O. IMPROVEMENT 2004A
G.O. EQUIP. CERTIFICATES 2004C
G.O. IMPROVEMENT 2005A
G.O. EQUIP. CERTIFICATES 2005C
G.O. IMPROVEMENT 2006A
G.O. EQUIP. CERTIFICATES 2006C
G.O. EQUIP. CERTIFICATES 2007
LEASE EQUIPMENT LOAN
TOTAL LEVY
SPECIAL TAXING DISTRICT
HOUSING & REDEVELOPMENT
AUTHORITY (SPECIAL TAXING
.---. DISTRICT)
Property Value:
Property Value:
Property Value:
Property Value:
~.
TOTAL LEVY
CERTIFIED LEVY
FISCAL DISPARITY
NET LEVY
CITY PROPERTY
TAX RATE
150,000
200,000
250,000
300,000
PROPOSED
2444 24~ 2oos 2 07
2,528,050 2,717,660 3,126,774 3,634,875 16.25%
389,140 368,440 364,060 368,250
22,200 21,800 21,400 20,900
33,350 33,350 67,890 71,010
5,700 71,200 75,000 73,300
116,440 136,860 139,067 141,167
139,830 143,340 141,494 144,179
0 28,500 30,600 26,900
65,460 142,450 114,500 111,700
0 0 66,700 68,600
0 35,000 31,000 64,200
0 0 0 32,234
0 0 35,000 37,513
0 0 0 23,000
21.790 14.320 3.420 4
23.3 1.960 3.712.920 4.216.904 4.817.827 14.25°k
116.506 13 1 136.124 173.760 27.65%
2005 2006 2~
3,712,920 4,216,904 4,817,827 14.25%
3,712,920 4,216,904 4,817,827
27 4 f 8~ ~QZQ),
3.434.460 3.931.834 4.532.757 15.28%
37.295 37.259 ? ?
I~X ~X I~
559.43 558.89 ?
745.90 745.18 ?
932.38 931.48 ?
1,118.85 1,117.77 ?
-9-
GENERAL FUND
REVENUE
pp~ GENERAL PROPERTY TAXES
48000 31010 CURRENT AD VALOREM TAXES
48000 31020 DELINQ. AD VALOREM TAXES
48000 31040 FISCAL DISPARITY
48000 31910 PENALTIES & INTEREST
48000 35200 FORFEIT TAX SALE APPORT.
TAXES
TERGOVERNMENTAL REVENU
42000 33100 FEDERAL GRANT -POLICE
48200 33160 GRANTS FROM OTHER GOVT. UNIT
48200 33401 LOCAL GOVERNMENT AID
48200 33402 MKT VALUE HOMESTEAD CR
48200 33415 OTHER STATE GRANTS
43000 33418 STATE AID FOR STREETS
42000 33421 POLICE PENSION AID
48200 33425 PERA STATE AID
I N;
42000 32010
42000 32020
42000 32030
42000 32040
42000 32050
42000 32072
42000 32175
42000 32180
42000 32190
INTERGOVERNMENTAL REVENUE
LIQUOR LICENSES
BEER LICENSES
GARBAGE LICENSES
ENTERTAINMENT LICENSES
CIGARETTE LICENSES
PUBLIC GATHERING P.
FIREWORKS LICENSES
MISC. BUSINESS LICENSES
MISC. BUSINESS PERMITS
LICENSES
NON-BUSINESS LICENSES & PERMITS
42000 32210 BUILDING PERMITS
42000 32215 FIRE PERMITS
42000 32230 PLUMBING PERMITS
42000 32235 HEATING PERMITS
42000 32236 PUBLIC LAND PERMITS
42000 32238 PLUMBING REGISTRATION
42000 32241 DOG/CAT LICENSES
42000 32270 GRADING/EXCAVATING
42000 32290 MISC. P&I FEES
42000 34104 PLAN CHECK FEES
42000 34310 CONTAINERS ON RIGHT OF WAY
NON-BUS.. LIC. & PERMITS
2004 2005 2006 2007
ACTUAL ACTUAL APPROVED PROPOSED
2,001,969 2,565,173 2,470,435 2,948,131 19.34%
28,668 40,822 40,000 50,000 25.00%
257,885 275,278 280,000 285,000 1.79%
6,007 7,561 10,000 8,000 •20.00%
Q Q 5.000 5.000 0.00%
2.294.529 2.868.834 0 4 29 1 17.49%
56,150 15,547 0 0
0 0 0 0
0 0 0' 0
219,698 193,437 220,000 220,000 0.00%
0 0 0 0
35,742 60,000 46,000 46,000 0.00%
7
6
2,
7
0 7
1,6
6
2 70
,0
0
0 7
0
0
0
0, 0.00%
C
f
~C
1
1
S[~]LY ¢~
~~
n~~
f
YaYYY C
nG
f
1
6.O6Q ~
n
C
f
1
6.060 0.00%
380.357 43 6.706 342.060 342.060 0.00°k
14,200 12,400 12,100 12,100 0.00%
75 900 100 400 300.00%
900 900 900 900 0.00%
225 330 200 300 50.00°!0
0 200 0 200
300 0 900 900
200 0 300 300 0.00%
3,000 3,050 2,550 2,550 0.00°k
2.745 1.440 2.500 x,500 0.00%
21.645 19.220 1 5 20.150 3.07°k
162,805 135,876 170,000 150,000 -11.76%
144 0 200 200 0.00%
14,034 9,918 15,000 15,000 0.00%
9,486 9,718 10,000 10,000 0.00%
0 0 0 0
0 0 0 0
5,942 1,510 6,000 2,000
7,140 5,278 4,000 6,000 50.00%
0 0 0 0
78,536 63,883 80,000 70,000 -12.50%
~„5Q 1~ 1_QO_ 1_QQ 0.00%
278.237 226.283 285.300 25 0 -11.22%
_~Q_
~ 1
GENERAL FUND
REVENUE
2004 2005 2006 2007
ACTUAL ACTUAL APPROVED PJtOPOSED
D~ GENERAL GOVT. CHARGE
42000 34103 ZONING CHARGES 2 25 0 0
41000 34105 SALES OF MAPS, ETC. 542 376 600 500 -16.67%
41000 34107 ASSESSMENT SEARCHES 600 60 400 400 0.00%
42000 34114 PLANNING COMM. APPL. 10,935 21,340 10,000 10,000 0.00%
42000 34210 DOG PICK-UP CHARGES 1,925 2,575 2,000 3,000 50.00°k
42000 34215 KENNEL BOARDING FEES 0 0 0 500
42000 34230 MISC. SERVICE CHARGES 6 6 0 0
48100 37290 STREET LIGHT FEE 105,673 107,696 106,000 106,000 0.00%
48100 38051 FRANCHISE FEE -CABLE T.V. 93,451 95,063 95,000 97,000 2.11 °k
48100 38055 ANTENNA LEASE 71,032 74,031 76,600 76,600 0.00%
48100 38060 CENTER POINT FRANCHISE FEE 89,435 89,$20 90,000 90,000 0.00%
48100 38070 XCEL ENERGY FRANCHISE FEE 107.578 108.996 105.000 110.000 4.76%
GENERAL GOVT. CHARGES 4 1 7 499.988 485.600 494.000 1.73%
OTHER REVENUE
49300 34108 ADMIN SUPPORT & OVERHEAD 138,892 145,011 140,000 147,000 5.00%
45000 34110 DEPOT RENTAL 4,094 4,050 4,500 .4,000 -11.11°k
42000 34191 SURCHARGES 511 354 500 300 -40.00%
42000 34203 ACCIDENT REPORTS 1,815 -1,681 2,000 1,500 -25.00%
45000 34940 CEMETERY SALE OF LOTS 4,225 4,025 4000 4,200 5.00%
42000 35100 COURT FINES 110,122 96,293 110,000 90,000 -18.18%
41000 36100 NEW ASSESSMENTS 2,189 2,054 1,000 2,000 100.00%
41000 36200 MISCELLANEOUS 27,931 33,465 25,000 30,000 20.00%
48400 36210 INTEREST 18,017 50,668 20,000 45,000 125.00%
48500 39101, SALE OF PROP. & EQUIPMENT 31.074 27.534 3.500 10.000 185.71°~
OTHER REVENUE 338.870 365.135 310.500 334.000 7.57%
49300 39203 TRANS. FROM OTHER FUNDS 0 0 0 0
49300 39210 INTERFUND TRANSFERS 10,583 11,939 10,500 12,000 14.29%
47000 39310 PROCEED FROM SALE OF BONDS 483.133 2 1 70 286.500 230.000 -19.72%
TOTAL TRANSFERS/BONDS 493.716 2 3 64 297.000 242.000 -18.52%
TOTAL REVENUE 4.288.533 64. 39.811 4 44 4.981.641 9.60°k
BREAKDOWN BY PERCENTAGE
GENERAL PROPERTY TAXES 53.50% 62.26% 61.72% 66.17°k 4.45%
INTERGOVERNMENTAL REVENUE 8.87°k 7.47% 7.53% 6.87°k -0.66%
LICENSES 0.50% 0.41% 0.43% 0.40% -0.03%
NON-BU SINESS LICENSES & PERMITS 6.49% 4.88% 6.28% 5.08% -1.19%
GENERAL GOVERNMENT CHARGES 11.22% 10.78% 10.68% 9.92% -0.77%
OTHER REVENUE 7.90% 7.87% 6.83% 6.70% -0.13%
TRANSFERS 11.51% 6.33% 6.53% 4.86°0 -1.68%
TOTAL 100.00% 100.00% 100•QOok 100.0 °0 0.00%
_~~_
2007 PROPOSED CAPITAL OUTLAY -ALL FUNDS
DEPARTMENT PROPOSED
DEPARTMENT UND ITEM REQUEST AMOUNT
City Manager/Clerk General Scanner for Laser Fiche 0 0 0
Finance General Printer 1,000 0 0
Police General Squad Car - 2007 Crown Victoria 27,000 27,000
Radar Unit 2,050 0
Copy Machine 15,000 0
In-Squad Camera System 5,945 0 27,000
PlanningAnspection General GIS Software 0 0 0
Streets General Boxes & Sander for Plow Trucks 131,125 131,130
Wheel Front End Loader - 50% 62,000 62,000 193,130
City Hall Bldg. & Srvs . General Chairs -Council Chambers 5,500 5,500
City Entrance Signs 0 0 5,500
Parks General
Dept. Request Trailer 7,000 6,130
Langdon Out Lot Survey 2,000 0
4X4 Pick up 1/2 Ton 20,000 0 6,130
POSAC Request 3 Play Structure 0 0
20 Picnic Tables 0 0
Park Plan
From Park Dedication Fees? 0 0
Park Signage 0 0
Dog Bag Dlspensors 0 0 0
Recreation POSAC Request Skate Park Improvement
From Park Dedication Fees ? 10.000 Q 0
TOTAL GENERAL FUND 288.620 231.760 231.760
-12-
Area Fire Service Three Mobile Data Computers 3,600 3,600
Seif Contained Breathing Apparatus
W1Harness and Mask 105,000 8,400
One 16" Chainsaw-Cutters Edge
with Depth Guard 1,750 1,750
Emergency Prepareness SUV 15.000 15 28,750
TOTAL AREA FIRE SERVICE FUND 125.350 28.750 28.750
Liquor Store Liquor Fund Cardboard Compactor Q 0
TOTAL LIQUOR FUND Q Q
Water Water Fund Stihl Saw - 50% 750 750
Loader - 30% 37,200 37,200
Pick Up Truck 45,000 45,000
TOTAL WATER FUND 62.950 82.950
Sewer
Sewer Fund Stihl Saw - 50% 750 750
Generators (3) 50,000 50,000
Loader - 20% 24.800 24.800
TOTAL SEWER FUND 75.550 75.550
Docks Dock Fund Dock Deck Replacement 2,200 2,200
Parks CIO Transfer 875 880
Multiple Slip Dock 16,000 16,000 19,080
Rip Rap 20,000 20,000
Denning Cove Dredge 15,000 15.000
TOTAL DOCK FUND 54.075 54.080
270,050
-13-
_m
~~
~~ .
~M~
a,~ y,M.d~„e .
~--~
~"~
O
u
Guidelines for
Preparing
City Budgets
a resear~~ memo for city o~iCials
215b.1
July 2006
$15
2007
League o~ Minnesota Cities
-14-
~ 1
Table of Contents
Preface ...............................................................................:........,..................,..........,................................... 3
I. N ew for 2007 .................................................................................................:...................:........:... .. 8
A. General legislative changes impacting cities .......................................................................... :. 8
B. Changes in personnel-related law ........................................................................................... 10
C. Clean Water Legacy Act ......................................................................................................... 12
D. Land use .................................................................................................................................. 13
E. Insurance law change ................................ ............................. ........................................... 14
II. Budgeting basics.....: ................................................................................................................... 15
A. Budget is a plan ....................................................................................................................... 15
B. Capital planning ................~..................................................................................................... 16
C. City fund balances ................................................................................................................... l d
D. Budget format .....................................................................:................................................... 17
E. GASB 34 ...............................................................................:...........:......................................... 17
F. Budgeting process ....................................................................................................................... 1.7
III. Expenditures .................................................................:..........................................................:.. 21
A. Categories of expenditures ...................................................................................................... 21
B. Budget considerations ............:................................................................................................ 23
C. Pension and retirement costs ........................................................................:.......................... 30
D. Fees, dues, and insurance costs .....................................:......................................................... 42
E. Tax costs ..................................................................................................................................... 46
IV. Revenues ........................................................ ........................................................................ 53
A. Tax revenue .:........................................................................................................................... 53
B. Property taxes .......................................................................................................................... 53
C. Setting the property tax levy .............................................................................:..:.................. 54
D. Local lodging taxes ...........................................................................................................:..... 57
E. Gambling tax and fund ................................................................................................................ 57
F. General state aid .....................................:.................................................................................... 58
G.
..............................................................................
Market value homestead credit .........:.... ... 60
H. Fiscal disparities programs ...............................................................................:...................... 61
q League of Minnesota Cities
-15-
~~
C'
0
I. Categorical state aid .................................................................................................................... 62
J. Amortization aid .................... ........................................................... ................................. 65
K. Loss of amortization aid entitlement ....................................................................................... 65
L. Street and highway funding ............... ........:........................................................................... 65
M. Highway user tax distribution fund ......................................:.................................................. 67
N. Clean Water Legacy Act ......................................................................................................... 68
O. Additional revenue sources -Licenses and permits ................................................................ 69
V. Truth-in-taxation .............................................................................................................. . ...... 72
A. Proposed levy and budget ....................................................................................................... 72
B. TNT hearing exelnptions .................................................................................................:...... 72
C. Selecting hearing dates ............................................................................................................ 73
D. Parcel-specific notices .................................:...........:...............................................................
I 74
E. Advertising requirements ..................................................................................:......................... 75
F. TNT hearings .............................................................................................................................. 76
G. Certification of final levy ........................................................................................................ 77
H. Compliance and enforcement .................................................................................................. 77
I. Administrative costs ........................ ....................................................................................... 78
J. TNT Summary Chart ..........................:....................:...............:.................:................................ 78
VI. Financial reporting ......................:.........:.........................................................................:.:......... 79
A. GASB reporting standards ..................................................................................................... 79
B. Levy information ......................................................................................................... ...... 80
C. Budget information ................................................................................................................. 80
D. Annual financial statement ..... .........................................................:................................... 80
E. Municipal }iquor financial statement .......................................................................................... 82
F. Enforcement power of state auditor .......... .............................................................................. 82
G. City reporting under Minn. Stat. § 6.74 .................................................................................. 83
H. Development fee reporting ...................................................................................................... 83
I. Other types of financial reports .............:..................................................................................... 83
J. Audits ... ...................................................................................................................................83
Append ix A ..........................................:............................................:.........:. ................ .................... 84
Append ix B ............................................................................,...........................................:....................... . 86
y Guidelines for Preparing City Budgets 2007
s
-16-
I. New for 2007
A. General legislative changes impacting cities
Minnesota's New The 2006 Legislature spent a significant amount of time discussing eminent domain law,
Eminent Domain Law enerall restrictin its use and increasin com ensation to roe owners. While these
2006 Minn. Laws ch. g Y g g P P P rtY
zia. changes impact all property acquisition for city infrastructure development and redevelopment
efforts, they do not routinely affect city-operating budgets statewide.
The 2006 Legislature also enacted legislation creating a Minnesota Ballpark Authority to
zoo6 nainn. laws oh. construct and operate a Major League ballpark. Funding for the (Twins) stadium will come from
257 to be codified as bonds, issued by Hennepin County, and a .15 percent local option sales tax to provide revenue for
Minn. Slat. § 473.75 to payment of debt service on the bonds. All cities, including cities in Hennepin County, aze exempt
a73.763. from this Vocal sales tax (and all local action sales taxes) based on previous law.
Minn. Stat. § 297A.98
1. No levy limits
Cities are not subject to state-imposed levy limits as they budget and levy for 2007. The 2006
Legislature did not impose any new limitations on property tax authority.
2. MVHC reimbursement restored
The 2006 Legislature reinstated the market value homestead credit reimbursement (MVHC) for
103 cities that did not receive money from this state program during the years 2003-2006. The
2003 Legislature balanced. a major state deficit, in part, by cutting state aids and credits to cities.
Under the cuts, some cities experienced a reduction in the MVHC reimbursement. The 2005
Legislature extended the MVHC reimbursement cuts for 103 cities for 2005 and 2006. The 2006
Legislature did not extend the cuts so the 103 cities will receive the full MVHC credit for taxes
payable 2007.
See.Marke~ Vahee please note: MVHC is a part of each city's certified levy. Part of your levy is paid to your city by
Homestead t"redu roe' the county from property tax receipts, with the balance paid by the state via MVHC.
reimbursement. MVHC is a state credit that is already figured in as a portion of your certified
levy. Do not budget to receive MVHC dollars above your total certified levy.
With the reinstatement of the MVHC appropriation, please be reminded that these funds are paid
to the city by the county as part of the city's adopted and certified levy. This means that for 2007,
cities should receive their entire certified Iery without reduction and without any cities
experiencing a MVHC shortfall. Do not budget to receive MVHC dollars above your total
certified levy.
3. LGA funding
2006 Minn. L-aa~s ch The 2006 Legislature did not change the local government aid (LGA) formula; nor did it
259, arr. ? § A, amending a ro riate additional funds for this ro ram. LGA a able in 2007 will be available from the
Minn. Slat. §477A.01a, PP P P g P Y
subd. 1, Department of Revenue during the first week of August 2006.
One clarification specifies that the Department of Revenue must have. extensive information
about annexations (boundary adjustments), or changes in form of government, by July 15 to
calculate LGA adjustments for taxes payable the following year.
League of Minnesota Cities
_17_
4. Taconite .aid
2006 Minn. Laws gin. The 2006 tax bill establishes a special fund and creates aone-time 2007 distribution of 38.4 cents
259, an. t2, sec.13 er ton of the taconite roduction tax that would otherwise be distributed into the property tax
amending Minn. Stet. § P P
z9s.296t. relief account. The properly tax relief account currently has sufficient resources to cover the
ongoing taconite homestead credit without this one-time distribution. Revenue in the special fund
is allocated to a variety of infrastructure projects in the taconite tax relief area.
5. Local taxes
zoo6 Mutt. Laws, ott. The 2006 Legislature gave the cities of Austin, Baxter, Brainerd, and Owatonna the authority to
2s9, air. 3, Seotions 9-
12. collect a local sales tax. This continues a trend of recent years: A growing number of cities have
obtained specific legislative authority and a favorable vote from residents (a local referendum) to
See Scc.IV, Reeermes. impose a local sales tax for purchases made in or received within the city. Generally, the sales tax
funds specific local capital improvement projects with regional significance.
6. Bonding for transportation .projects
zoo6 Minn. Laws en. The 2006 bonding bill provides, among other things, $55 million in bonds to match federal
zsg. money and to replace or rehabilitate local deficient bridges. Political subdivisions may use grants
made under this section to construct or reconstruct bridges-or to pay costs to abandon bridges
that cannot be replaced.
Construction and reconstruction of local roads of regional significance receive $I6 million in
bonds. Of that amount, $7.65 is for grants to counties to assist in paying the costs of capital
Minn. Star. § 174.52,
sttbd. 4. improvement projects on county state-aid highways outside of the metropolitan area.
The bonding bill also provides $2 million for capital assistance for greater Minnesota cities
transit systems. Up to 80 percent of this money is for the non-federal. share of transit capital
facilities.
7. Municipal state-aid for streets in larger cities
Minn Stat. $ 162.1.8, Any city, with a population of 5,000 or more, can now issue larger obligations, or bonds, in
subd. I ame~~ded by antiC1 ation of receivin munici al state-aid for streets. The 2006 Legislature increased the
?006 Minn. Laws ch. p g p
zs9, art. ~, seg. 3 allowable-bond percentage limit from 50 percent to 40 percent of the last annual allotment of
municipal state-aid fund. Also, the five-year maturity limit on these obligations is eliminated
by this amendment. (Cities use these anticipation bonds to establish, locate, relocate,
construct, reconstruct, and improve municipal state-aid streets within the city.)
8. Sewer and water bond term increased
zoo6 tvlinrt. Laws oit. In the public finance bill, the 2006 Legislature increases the term for sewer and water system
2s9, Sec. 2 amending bonds from 30- ear term to a 40- ear term. The 40- ear term cannot exceed the useful life of the
y y y
Minn. Stat. § 469.035
.asset.
9. HRA and EDA bond law changes
zoo6 Mann. Laws oh. A city housing and redevelopment authority (HRA) may now sell bonds below par value. In
259, Sec. 7 amending addition the maximum term of economic development authority (EDA) bonds is now 30 years
Minn. Stat. § 469.035 ~
instead of 20 years.
Guidelines for Preparing City Budgets 2007
-~~'
10. Change in market value definition for debt limits
200 na;~~n. Lawa ~h. The term "market value" (or "taxable market value" or "market valuation") now means the total
Minns Stet § 469.035 taxable market value of properly within the local unit of government before any adjustments for
tax increment, fiscal disparity, powerline credit or wind energy values, but after the limited
market adjustments and "This Old House" exclusions.
11. Utility property tax abatements
zooci Mi,»i. Laws ch. Effective Aug. 1, 2006, a political subdivision may grant abatements to utility property
zs9. mcludin ersonal roe b contract or otherwise under its eneral abatement authori
(• g P P P m')~ Y g tY•
This law also authorizes granting an abatement if the governing body finds that it would be in the
public interest to do so because granting the abatement will stabilize the tax base through
equalization of the property tax revenues for a specified period of time with respect to a taxpayer
whose property is valued under the rules that apply to utility property.
12. Emergency medical services district sunset extended
zoos Mi»t. Laws alt. The emergency medical service special taxing districts will not expire in 2009 but are extended
2s9 amending 2001 until taxes levied n 2011 a able in 2012.
Minn. Laws First ~ P Y
Special Session ch. 5,
art. 3, sec. 8, as
amended by 2005 Minn.
Laws ch. 1 s, art. 3, sec.
19.
B. Changes in personnel-related law
1. Paid time off for organ donation
200 Minn. Lauw. oh. Anew law provides that public employers, who employ more than 20 employees, must grant
220 to be codified az em ]o ees who work an avera a of more than 20 hours a week a ald leave of absence to
Minn. Stet. § 181.945 6 P Y ( g ) P
undergo a medical procedure seeking to donate an organ or partial organ to another person.
"Employee" for the purposes of this law includes all individuals employed at any site owned or
operated by a public employer. The paid leave may not exceed 40 work hours, unless agreed to
by the employer.
2. Unpaid leave for families of mobilized military members
~ooe Min". La.vs ah. A newly enacted section of state law requires that employers, including cities, grant a leave of
273 to be codified at absence without a to an em to ee whose immediate famil member is ordered into active
Minn. Stet. § 181.948. P Y P Y Y
service. The amount of leave provided may be limited to the actual time necessary for the
employee to attend atend-off or homecoming ceremony for the mobilized service member, not
to exceed one day's duration in any calendar year..
2ooti n-rin". Lai°q °n. Another new law requires that employers (including the state and all governmental subdivisions)
273 to be oodified at rant u to 10 workin da s of un atd leave to an em to ee whose immediate famil member
Minn, slat. § lst.947. g P g Y P P Y Y
has been injured or killed while engaged in active military service. For the purposes of this. law,
immediate family member is a parent, child, grandparent, sibling or spouse.
10
League of Minnesota Cities
-19-
3. Volunteer firefighters not covered by retirement plans
2ooe Minn. Laws cl~. Volunteer firefighters of a city fire deparhnent, or an independent nonprofit firefighting
z71, art. 3, Sec. 33 who are not covered by police and fire retirement plan offered by PERA or by a
co oration
~
amending Minn. Stat. §
353D.02, adding snba. ,
volunteer firefighters relief association, may choose to participate in PERA. An eligible
7• firefighter's decision to participate in PERA is irrevocable. Before any payments are made, the
city must approve the firefighter's decision to elect PERA retirement coverage.
2oob M;nn. Laws oh. Under this new law, a volunteer firefighter's PERA account can be funded in one of two ways.
27I, art. 3, Sec. 35
amending Minn. Stat. § Either the volunteer firefi hter must contribute at least 7.5 percent of any compensation he or she
g
353D.03, adding 5uba. ,
receives for firefighting services -- or if the city approves the firefighter s choice to participate in
6. PERA -- the volunteer firefighter and the city shall contribute at least 7.5 percent of any
compensation received for firefighting services.
4. Government Accounting Standards Board (GASB) and
C;~ther Post-Employment Benefits (OPEB)
See Sec. II Retiree OPEB generally refers to retiree health care and other benefits offered after employment. The
Health Insurance overnment accounting standards known as GASB No. 43 and GASB No. 45 treat post-
g
employment benefits as current costs rather than deferred costs.
• GASB Statement Number 43: Financial Reporting for Post-Employment Benefits Other
Than Pensions establishes uniform financial reporting standards for other post-employment
benefit plans.
• GASB Statement Number 45: Accounting and Financial Reporting by Employers for Post-
Employment Benefits Other Than Pensions addresses standards for the measurement,
recognition, and display of employers' other post-employment benefit expense/expenditures
and related liabilities (assets), note disclosures, and required supplementary information if
applicable.
Virtually all Minnesota public-sector employers will have some OPEB liability, regardless of
their size, whether they contribute towards retiree contributions, or whether they currently have
retirees on their health plan. This is due to a provision in Minnesota statute that requires cities
(and other public-sector entities) to allow early retirees the option. to stay on the active employee
plan until they turn 65. In Minnesota, when an employee retires under age 65, the most the city
can charge is the group premium rate for the active employee plan. This rate is typically less than
the retiree's expected cost and creates an issue known as implicit rate subsidy, which is
considered to be other post-employment benefits under GASB and must be quantified and
reflected on the city's financial statements. These standards will be phased-in based on the
revenue of the employer. However, by Dec. 15, 2007, all cities must follow GASB No. 43. By
Dec. 15, 2008, GASB No. 45 will apply to all employers. Cities should take steps now to comply
with these complex new standards. Contact the League's HR & Benefits Department for more
information.
Guidelines for Preparing City Budgets 2007
II
_'ZO _
5. Police and firefighter training funds
a. Peace Officer Standards and Training Board reimbursements
funded
zoos Minn. Laws. ~n The 2006 Legislature appropriated an additional $200,000 to reimburse local governments for
z~' peace officer training costs in fiscal year 2007.
b. Fire Safety Account
zoo6 Minn. Laws gyn. The 2006 Legislature enacted legislation repeating the fire insurance tax and establishing a new
zt7, seg. a, repealing
Minn. Slat. §2971.05, Fire Safe Account. Commercial and residential insurers that rovide fire and non-liabili
~' p ty
Saba. 6. insurance protection must collect a 0.65 percent surcharge on fire premiums and assessments.
zoos Minn. Laws gyn. The funds from this surcharge go into the newly created Fire Safety Account. (Farmers' mutual
217 to be codified at fire insurance companies and township mutual fire insurance companies are exempt from this
Minn. stet. §299F.otz. new law.)
The law also creates a Fire Service Advisory Committee and authorizes the commissioner of the
Department of Public Safety to spend the funds in the Fire Safety Account on activities and
programs that the committee recommends. The League of Minnesota Cities appoints two of the
advisory committee members.
C. Clean Water Legacy Act
zoob Minn: Laws gyn. The 2006 Legislature passed legislation to begin cleaning up impaired state waters-and to
251 to be codifiedat
Minn. Stet. Chap. com I with the federal Clean Water Act. The Clean Water Le ac Act rovides funds to the
P Y g Y P
t taD.os- t taD.as. Minnesota Public Facilities Authority (PFA) for wastewater capital improvement projects.
Minnesota Public Through the State Revolving Fund (SRF) the PFA provides $32,800,000 in low-interest loans to
r-aciuties priority projects. Also, the Wastewater Infrastructure Fund provides $23,000,000 in supplemental
assistance through matching grants with USDA-Rural Development or zero interest deferred
loans for priority projects.
The final clean water package also included $8.31 million in state bonding for three other
programs: the Phosphorus Reduction Grants program, the Smal] Community Wastewater
Treatment grant and Loan program, and the TMDL Grants program. The time to apply for these
grants was very short and closed July 31, 2006.
loge Minn. laws gin. .The law also creates a Small Community Wastewater program awarding loans and, in some
251 Sec. t 5 to be
codified at Minn. Slat. situations rants to overnmental units to re lace failin or inade uate individual se ttc s stems.
~ g g p g Q P Y
§aai,a.o7s This grant and loan program uses the existing Project Priority List (PPL) scores of eligible
rnbi;c Faciiuies projects to determine which projects will be funded. The Minnesota Public Facilities Authority
Authot9ty (PFA) administers the program and awards loans to local units of government. When the area
served by a project has•a median household income below the state average median household
income, the governmental unit may receive 50 percent of the funding as a grant. Funds for small
communities to develop technical and managerial skills related to wastewater treatment are also a
component of this program. Total awards are capped at $500,000 per year, but a project that will
take multiple years to be completed could be given a multiyear commitment. The mix of funding
could include up to 50 percent grants, with the balance being covered by state-subsidized low
interest loans. Projects must have a project proposal approved by the MPCA. The projects will be
ranked for funding priority using the current project priority list criteria.
12
League of Minnesota Cities
-2~-
2006 Minn. Laws, eit. The Phosphorus Reduction Grant program provides $2.31 million and covers up to 75 percent of
251 Sec. l4 to be the ca ital costs of addin hos horns treatment to a wastewater treatment faciliTy. Funds go first
codified at Minn. Stat. ¢ p. g p p
44fiA.074 to any eligible new project that starts construction on or after July 1, 2006. The application form
for the Phosphorous Reduction Grant program should be available on the PFA web site as of July
1, 2006. For both new and retroactive grants (discussed below), the application form requires
Public Facilities detailed information on construction (as-bid or incurred), engineering, and inspection costs. The
.lntnnrity timeline for applications for new grants was only from July 1, 2006, to July 31, 2006.
Remaining funds for each calendar year go to retroactively cover portions of the debt on eligible
phosphorus treatment infrastructure installed between March 28, 2000, and July 1, 2006, as long
as the city properly applies to the PFA and qualifies before June 30, 2008. (Retroactive grants
will be issued in chronological order based on the date a facility's phosphorous reduction plan
was approved by the Minnesota Pollution Control Agency.)
Going forward, projects that meet eligibility criteria, and obtain approval from the MPCA before
July 1, 2010, may receive 75 percent of their capital costs. After July 1, 2010, eligible projects
may receive 50 percent cf their capital costs.
D. Land use
1. Legislature requires municipal action on release of letters
of credit
A4inn. Laws ch. 204 The 2006 Legislature made changes. to subdivision regulation law that could affect city budgets.
amending Minn. Stet. ¢ Effective Au 1 2006, a ci or town ma re wire that an a licant seekin subdivision a royal
462.358, subd. 2a g• ~ n' Y q PP g pp
establish an escrow account or other financial security to reimburse the municipality for direct
established- costs relating to the review, approval, and inspection of the project. In addition, this
law establishes a 30-day deadline for release and return of an applicant's financial security when
the municipality's conditions for approval are met.
Once an applicant vouches, by certified letter, that all of the city's subdivision requirements are
met, the city has 30 days to release and return to the applicant any and all financial securities tied
to the requirements-if the city does not release the financial security within 30 days, the city must
pay any accrued interest to the applicant.
If the city determines that the conditions for approval are not met by the applicant, the city has
seven days from receipt of the certified letter to provide written notice to the applicant indicating
which specific conditions are not met. A municipality must require a maintenance or
performance bond from any subcontractor that has not yet met all the municipality's remaining
requirements.
2. Airport provisions modified
zoo6 Minn. Laws eh. A city is not eligible for assistance from the state airports fund if it adopts a comprehensive plan
261, sec: a omending that the commissioner of Transportation finds is incompatible with the state aviation plan. ,
Minn. Stat. ¢360.017,
subd. 1
Guidelines for Preparing City Budgets 2007
13
-22-
t 1
E, Insurance law change
Minn. taws on. Zs'-, The 2006 .Legislature amended joint powers law clarifying that the participants in a joint powers
amending Minn. Stat. § arran ement are not liable for the acts or omission of other artici ants. The law now treats the
471.59, adding subd. 1 a, g P p
participants as a single entity for purposes of the tort liability limits.
The new law also adjusts the statutory tort caps for the state and local units of government in two
phases. The cap is currently set at $300,000 per individual and $1,000,000 per event. Beginning
on Jan. 1, 2008, the cap increases to $400,000 per individual and $1.2 million per event. On July
See III. Expenditures i, 2009, the cap increases to $SOO,000per individual. and $1.5 million per event. Given the delay
in the increase of the cap, cities generally do not need to figure in this as a 2007 increase in
insurance premiums.
14
League of Minnesota Cities
-23-
Budgeting basics
Budgeting is the first and most essential ingredient of any efficient system of
administration. This guide outlines basic budgeting concepts and processes that
a city of any size may need to consider. However, cities with home rule
charters, special laws, local ordinances or unique circumstances may have
additional or special requirements and considerations.
All cities are required to prepare an annual budget and submit a property tax
see v. truth-rn-taxation. levy to the county auditor.. Some cities are required to provide notice of the
proposed budget adoption, and. hold a public hearing on the proposed budget
and property tax levy.
~A. Budget is a plan
A city budget is a comprehensive financial plan for a specific period of time. It
outlines city activities and service.levels, and contains estimates of probable
costs and available revenues during the coming year. (For cities, the fiscal year
See Ch. 22 of the League's is the calendar ear. A bud et can be re ared usin an number of bud etin
I-iendtxiok for Minnesota Cities for y ) g p p g y g g
adescription of budgeting techniques. Whatever the technique employed, the city will need to estimate
teci,niques. future expenditures and revenues and make adjustments to balance the budget.
see section iri. Expenditures. Cities must estimate their expected expenditures for the upcoming year. Cities
should consider costs associated with certain established categories of
expenditures. Common expenses across all categories of expenditures include
equipment, supplies, materials, maintenance, repairs, training and fuel costs.
Cities may need to give special consideration to certain types of common
expenses, such as employment,. pension, and tax costs.
see seotion iv. Revenues. Cities should also review their total revenue picture. As a general rule, if the
state. does not specifically authorize cities to use a revenue source, the city
' cannot use that source. Generally, property taxes, state aid, license fees, and
service charges comprise the largest sources of revenue for most Minnesota
cities. The city should look at the past performance and future expectations of
each revenue source, taking into account any recent trends or institutional
changes.
~In order to balance the budget, total estimated revenues must be equal to or
exceed total estimated expen itures. If total estimated expenditures are too high,
the council will need to consider reducing expected costs (such as by
eliminating programs or cutting services), increasing revenues where possible
(such as by raising license fees and service charges), or both. If the total
estimated revenues are higher than the total estimated costs, a city may be able
to reduce the amount of the property tax levy.
Guidelines for Preparing City Budgets 2007
~s
-24-
Budgeting is critical for city finance and administration. Proper budgeting can
assist the council in a number of respects. Budgeting is a means by which the
council can obtain estimates of the expected revenues for the coming year and
plan city spending. Because budget preparation involves necessary decisions
about the use of money, it facilitates important decision-making and can be tied
to achieving specific goals set by the council. Once the council has allocated
available money amongst the various city services, the budget can help control
expenditures. At the conclusion of the budget year, the budget document can
help the council evaluate the level and quality of city services provided during
the year.
B. Capital planning
When cities prepare their budgets for the upcoming festal year, councils must be
aware of the long-range financial problems and demands facing the city. In
addition to the annual budget, a city would be well served to prepare a long-
term financial plan that includes a capital improvement program, along-term
revenue program, and a capital budget. A capital improvement program and a
capital budget are especially critical.
Capital budgeting is a list of needed capital improvements (sewer and water
infrastructure, public buildings, equipment or land purchases), their order of
.priority, and the means of financing. The capital budget summarizes, for afive-
or six-year period, the capital or money requirements for capital improvements
or purchases. A capital budget allows a city to build up a fund balance for
capital projects. Priorities in the capital budget program remain tentative and the.
council should review them annually.
A capital budget often provides many advantages, including: (1) reducing or
stabilizing the property tax rate; (2) preventing peaks and valleys in a city's debt
retirement program; (3) allowing the city to move gradually to apay-as-you-go
program of capital expenditure financing; and (4) helping to preserve the city
credit rating by preventing an over-extension of credit and maintaining a credit
reserve for emergencies at all times.
Although capital budgeting may appear cumbersome and unwieldy to a small
city, this is actually not the case. A capital budget provides protection to the
small city, helping it avoid commitments and debts that would limit its ability to
later pay for needed capital improvements.
C. City fund balances
State lawmakers are increasingly interested in accurate statistics on local fund
balances. Unfortunately, municipal fund balances are not comparable to the
state fund balance. Cities' annual reports are likely to show high year-end
balances because of the end-of--the-year influx of revenues from property taxes
and state aid. These reserves, however, are needed to cover the operating
expenses of a city for the first five to six months of the next calendar year, until
cities again receive property tax revenues and state aid in June and July.
16
League of Minnesota Cities
-25-
see LMC c;ty fund baia<,oes ion. There is no single standard for determining an adequate fund balance. The
League urges cities to use the>financial strategy of designating fund balances.
Although all reserves {whether designated or undesignated) are reported to the
state auditor, the practice of designating reserves accumulated for a large future
purchase can help document the council's specific intentions for the use of these
funds. At a minimum, cities should designate a working capital fund and
designate adequate revenue for cash flow to cover operating expenses for the
first half of the next fiscal year.
D. Budget format
Two aspects of the budget format need to be considered: (1) the actual forms
used to prepare the budget; and (2) the classification or account titles for
summarizing the: data. Samples of actual forms for estimating expenditures and
See Appendices A and B for revenues to be used in preparing budgets are provided in the appendices of this
sample fornis.
document.
Minnesota offioe of the scare The Office of the State Auditor (OSA) provides the Uniform Chart of Accounts
Auditor Aecoundng Documents. to facilitate the preparation'of uniform annual financial statements. Every city
should consult this chart when preparing the annual budget and maintaining
financial records. The OSA recommends the adoption of the. uniform account
numbering., system for all cities, including cities under 2,500 in population,
whenever practical:-Rather than the numbering system, it is the chart's three-
dimensional structure (utilizing fund, account; and object codes) that is
important. The outline of accounts may also serve as a useful checklist when
preparing city budgets.
E. GASB 34
see section vL Alnan°~°t The Governmental Accounting Standards Board's (GASB) Statement No. 34
RePornng. established fnancial reporting standards for state and local governments
throughout the United States. All cities that is"sue audited annual financial
statements need to comply with some or all of the GASB 34 standards for
financial reporting. GASB 34 is a financial reporting framework that measures
the overall;<net £narACial condition of the city by;taking into account all long-
term assets and liabilities. One of the major aspects of GASB 34 is that long-
term assets should be reported at initial costs less depreciation.
F. Budgeting process
1. Background
The process of annual budget preparation. occurs within the framework of the
state property tax system. Property taxes. are generally the primary revenue
source for Minnesota cities: Each fall, cities submit their properly tax levies for
the following year to the county auditor. Counties;are responsible for property
tax administration; the Department of Revenue provides assistance ar-d
oversight.
Guidelines for Preparing City Budgets 2007
17
-26-
see section rv, Revenues, Minnesota cities also participate in revenue sharing and property-tax-relief
programs known as local government aid (LGA) and market value homestead
credit (MVHC). LGA supplements property tax revenue; MVHC reimburses
property tax revenue taken by a state homestead credit.
see section v. Truth-rn-ra~oaon. Cities must prepare and adopt proposed budgets and proposed property tax
levies. Cities over 500 population with more than nominal proposed property
tax increases are required to provide notice of the proposed budget adoption and
to hold public hearings on the proposed budget and property tax levy. The
"truth-in-taxation" (TNT) process is described later in this memo.
2. Timeframe
Cities generally prepare budgets in the summer. On or before Aug. 1, the
tviina. star. § a;~.a:ora. Department of Revenue notifies cities of state aid amounts. On or before Sept.
1, the Department of Revenue notifies cities of the applicable levy limit, if any.
n7inn. star. ~ ?~s.~a, sntad. ~. On or before Sept. 15, cities must adopt their proposed budget and certify their
h1inn. star. $ ns.o~~, sutra. tea l. proposed levy to the county auditor. The TNT public comment hearings, if
M;nn. star: g z~s.o~s, sand. a, required, must occur between Nov. 29 and Dec. 20. By Dec. 27, cities must
certify their final property tax levies to the county auditor after official adoption
R4inn. star. § ~~s.a~. of.the final levy and budget.
/
/Cities generally receive property tax. revenues and state aid at the end of the
VVV year and again in June and July. The county treasurer distributes property tax to
cities in two settlements, the first in June and the second in December. The state
distributes LGA payments to cities in two equal installments on or around July
n4;nn. star. ~ a~~n.ots. 20 and Dec. 26 each year. Cities receive half of their MVHC reimbursement on
Minn. StaL $ 273.138x, s~.t~d. a. Oct. 31 and the remaining half on Dec. 26.
3. Budgeting challenges
Beginning in 2003, many Minnesota cities faced difficult financial shortfalls.
The 2003 Legislature substantially reduced state aid. payments to cities, while at
the same time imposing severe levy limits on cities over 2,500 population..
Cities may need to continue considering a variety of strategies for meeting this
ongoing challenge, including:
• Reducing or even eliminating some services.
• Increasing reliance on user fees and other non-aid, non-tax revenue.
• Developing a transitional fiscal strategy, such as increased reliance on debt
or use of reserves until the revenue base has stabilized.
• Finding more efficient ways to operate the city.
• Pursuing alternative service delivery methods, such as cooperative
agreements with other governments, service contracts, use of volunteers,
privatization, and consolidation.
18
League of Minnesota Cities
_2~_
Each strategy has attractions, but also complications and pitfalls. The League's
online supplement to the Guidelines for Preparing City Budgets may assist city
officials in considering the options carefully, choosing those that make the most
See LMC Xesourcc l.'iuide for
DeatingH-;rt, r~ua~;~rcu~s: sense not only for short-term budget balancing, but also for achieving the long-
strareglesforr~lres. term well-being of the community and the city government. The supplement,
Resource Gurde for Dealing with Budget Cuts, is available on the LMC web
site.
Guidelines for Preparing City Budgets 2007
19
-ZH-
6 ~
Figure 7
City Expelnditures -1999 and 2004
Expenditure area 1999
Expenditures Percent
of Total 2004
Expenditures Percent
of Total Expenditure area. 2004 expend in
millions
Current Expenditures Current. Expenditures
General Government 337,929,381 8.42% 415,976,046 8.71% General Government 415.98
Public Safety 734,374,187 18.30% 976,091,050 20.44% Public Safety 976.09
Streets/Highways. 292,086,078 7.28% 361,970,354 7.58% Streets/Highways 361.97
Sanitation 15,468,582 0.39% 23,351,309 0.49°lo Sanitation 23.35
Health 29,604,813 0.74% 23,663,222 0.50% Health 23.66
Libraries 59,633,971 1.49% 67,312,368 1.41% Libraries 67.31
Park/Recreation 241,008,443 6.00% 313,356,698 6.56% Park/Recreation 313.36
HRAlEcon Dev 190,973,139 4.76% 309,320,559 6.48% HRA/Econ Dev 309.32
Airports 6,884;048 0.17% 9,923,747 0.21 % Airports 9.92
Miscellaneous 72,125,648 1.80% 66,278,385 1.39% Miscellaneous 66.28
Interest 202,112,558 5.04% 248,203,004 5.20% Interest 248.20
Capital Expenditures Total Capital Outlay 1,353.21
Total Capital Outlay .1,343,308,234 33.47% 1,353,214,080 28.33% Principle Payments 607.77
Principle Payments 488,044,915 12.16% 607,774,004 12.72% Total 4,776.43
Total 4,013,553,997 100.00% 4,776,434,826 100.00% Debt Redemption -refunded
bonds 124.99
Other Financing Uses Other financing uses 6.64
Debt Redemption -
refunded bonds 56,899,809 124,992,085 Transfers to Enterprise funds 104.02
Other financing uses 13,473,394 6,642,319 Transfers to Governmental
funds 697.31
Transfers to
Ente rise funds- 63,258,864 104,018,025
Transfers to
Governmental funds 676,046,874 697,314,048
~ ,soo
1,400
~ 1,200
1,000
C 600
~ 600
R aoo
0
0 200
Figure 1a
City Expenditures for 2004
3
c~°~ a'~e~ y{~~y
,mF v .A
Gece`~\~ e,~\\ ~~ee~4~
20
Qat~ ~~~ ~\~, ~Q. \ Q
League of Minnesota Cities
_29_
III. Expenditures
See Appendix A for sample fomt for Cities must estimate their expected costs for the upcoming fiscal year and
estimating expenditures. bUdg@t a000rdingly.
A. Categories of expenditures
Some categories of expenditures are common to most cities, although the
types of expenses included in each category will vary from city to city.
Following is a basic list of categories of expenditures. Many cities wil l have
some activity in most of these categories.
See Figures 1 ana ta. Figures 1 and la show the distribution of expenditures by all Minnesota
cities in calendar year 1998 and 2004.
Common expenses across all categories of expenditures include salaries and
other employment costs; equipment, supplies, materials, maintenance,
repairs, training, and fuel costs..
1. General government
Expenditures under this category include general costs for the administration
and finance of city government, including costs associated with the city
council. Cities should also budget for the costs of publishing ordinances and
meeting notices, and the costs of holding general and special elections.
Minn. Stat. y 206.57 When budgeting for election costs, cities should be again be aware of the
federal Help America Vote Act of 2002 (HAVA). The 2004 Legislature
made a number of changes to state elections law to conform to HAVA.
Polling places must have assisted voting systems that are accessible for
See the Secrctazy of States web site: individuals with disabilities. The systems must be certified by an
HAVA Questions and Answers independent testing authority and conform to current standards for voting
equipment issued by the federal Elections Assistance Commission (EAC).
Federal funds, funneled through counties, are available for costs associated
with accessible voting systems. Cities should consult with their county
auditor to find out how the required county plan allocates the federal dollars
to program, store, and maintain accessible voting equipment. Cities can then
budget for 2007 elections, if any, and potential costs associated with HAVA.
General government expenditures may include personnel costs, building
maintenance, and capital purchases. Most cities budget such general
government costs as a separate accounting category. Some, however, spread
these costs across other city operations on the theory that the costs are
overhead expenses.
Guidelines for Preparing City Budgets 2007
Z1
-30-
2. Public safety
Minn. stet. y 626sass. The basic costs of public safety include police protection, fire protection,
Mims Stat. § 626.8462. ambulance service, emergency preparedness, and some protective
inspections. Cities should be sure to budget for public safety training costs.
2005'Nlinn. Laws ch. 136, art. 1,
section 10, amended by 2006 Minn. Training costs include statutorily required training such as police-pursuit
Laws, Vii,. 2sz, art. l3 sec. lo. training and training requirements for part-time police officer licensure. The
2006 Legislature appropriated an additional $200,000 to reimburse local
governments for peace officer training costs in fiscal year 2007.
3. Streets and highways
Almost alt cities maintain streets and incur substantial associated
expenditures. Programs include snow and ice removal, seal coating, street
lighting, and street repairs. Sidewalk repair and replacement should also be
considered.
Due to changes made by the 2006 Legislature, any city with a population of
Minn. Slat. ~ 162.18, sut,d. l ~,r„eri~E,t 5,000 or more can now issue larger obligations, or bonds, in anticipation of
by 2006 Mim,. Laws ch. 254, art. 9, sec.
3 receiving municipal state-aid for streets. The 2006 Legislature increased the.
Mi,t,a. slat. rJ,. ass allowable bond percentage limit from 50 percent to 90 percent of the last
annual allotment of municipal state-aid fund. Also, the five-year maturity
limit on these obligations is eliminated by this amendment. (Cities use these
anticipation bonds to establish, locate, relocate, construct, reconstruct, and
improve municipal state-aid streets within the city.) Of course, cities must
comply with Minnesota Statutes Chapter 475 when issuing obligations.
4. Sanitation
The cost of sanitation is another basic expenditure. Cities should consider the
costs of sanitary sewers and treatment plants, refuse collection and disposal,
recycling, street cleaning, weed eradication,. and. insect and pest control.
/5. Health
General health costs include hospital facilities, nuisance abatement,
dilapidated building removal, and other health services.
6. Libraries
Some cities have local public libraries. The cost of running a library includes
acquisition and technology costs. Cities with bookmobiles should consider
fuel and maintenance costs.
Minn. star. ~ 13asa. Cities without their own libraries may be members of regional library
systems, which generally require cities to provide at least the same
contribution amount as the previous year. There is an exception when the tax
capacity of the city decreases.
Minn. star. ~ 134.34 For 2007, cities must contribute the full amount of the library maintenance of
effort (MOE). The Department of Education certifies annually to
participating cites the minimum contribution level required.
22 League of Minnesota Cities
-31-
7. Parks and recreation
Many cities have municipal parks and public recreation programs. Programs
of this type include parks, playgrounds, community buildings, playing fields,
athletic courts and ice rinks. State bleacher safety requirements should also
h4in°. s`at' ~ t6B.~1~. be considered.
8. Debt service
Cities with outstanding debt obligations, or bonds, must provide funds to
cover the principal and interest.
9. Miscellaneous
Cities may provide services in many other areas. Common programs include
cemeteries, airports, parking facilities,. golf courses, liquor stores,
environmental initiatives, and programs for senior citizens. Cities should
consider how much money is needed to support these programs. User fees
are frequently used to meet all, or a substantial portion, of the costs of these
programs.
B. Budget considerations
As noted above,. common expenses across all categories of expenditures
include salaries and other employment costs; equipment, supplies, materials,
maintenance, repairs, training, and fuel costs.
Cities may need to give certain types of common expenses special
consideration when planning budgets. Salaries, benefits, pension obligations,
fees, dues, insurance costs, and tax costs all influence the costs of city
government across categories of expenditures. The following explanations of
items in these expense areas provide guidelines for their budget implications.
1. Employment costs
Cities must budget for the wages, benefits, and workers' compensation costs
of both elected officials and city employees. For most cities, this includes
budgeting for health insurance costs. Employers must also budget for
retirement-related costs such as Social Security, Medicare, PERA, and relief
association contributions.
a. Wages and benefits
The budget must consider the salaries and. benefits of the mayor, council
members, city clerk, treasurer, assessors, auditors, attorneys, and other city
officials, along with other city employees.
Guidelines for Preparing City Budgets 2007 '
23
-32-
b. Adjustment factors
To estimate the cost of these salaries, a good starting point is salaries from
prior years. Cities can use the most recent full year for which they have
actual salary data and adjust the amounts to anticipate changes in wages.
Adjustment factors include: pay equity, market wage rates, and cost-of-living
increases (such as the consumer price index), employment contracts, and
merit increases.
Pay equity plan
Minn. scat. ~ 4~1.~9ai. In setting employee wages and salaries, cities must have implemented a pay
equity plan that addresses any gender bias. An amount may have to be
included in the budget to cover any salary increases necessary to implement
or maintain compliance with the state's pay equity laws.
Minr,: star. ~ 4~t.9v9 Beginning with 2005, the reporting cycle for pay equity compliance reports
was extended from three to five years. (The 2003 Legislature gave cities a
break from filing pay equity compliance reports for calendar years 2003 and
2004.)
ii. Market wage rates
Another adjustment factor is the market wage rate of other employees in both
the private and public sector. To retain good employees, salaries should be
. competitive. Information on can ent salaries is available from the League of
Minnesota Cities, the Labor Standards Division of the Minnesota
Department of Labor, and the U.S. Department of Labor. The League and the
Association of Metropolitan Municipalities offer an online salary and
benefits survey for current information on public sector market wage rates.
Salary Xc BenefiLS Survey for MN Locat
Governments.
iii. Consumer price index
seethe I3ttreau of Labor scadstios. A factor closely related to market wage rates is cost-of-living adjustments.
One measure is the consumer price index (CPI), which is published by the
Bureau of Labor Statistics, U.S. Department of Labor. The CPI is a measure
of the average change over time in the prices paid by consumers for goods
and services. The CPI is often used to provide cost-of-living wage
adjustments to American workers.
Other methods of adjusting salaries for inflation may also exist, depending
upon the particular city, and these may also be used instead of the CPI. Cities
commonly use either the national or the local CPI, but the national figure is
more current. The CPI for the Minneapolis-St. Paul area is updated only
twice a year for the reference months of January and July.
Tne mosc ontrenc £gures are avaitabto The national CPI for May 2006 was 4.2 percent higher than one year before.
from the CPI Hotline, ~6t2} ~zs-ssso. The annual Minneapolis-St. Paul area CPI for 2004 to 2005 increased by 2.8
percent. (As you can see, the Minneapolis-St. Paul data is not as current).
Generally, employers consider the CPI in salary adjustments for inflation so
that employee salary adjustments are in constant dollars.
24
League of Minnesota Cities
-33-
iv. Employment contracts
Cities must also consider union or employment contracts. A city must fulfill
contractual obligations, and will likely need to make some adjustment to
2007 salaries to allow for cost-of-living increases and to ensure the city
remains competitive with the wages offered by other employers.
v. Fair Labor Standards Act (ELBA)
29vs.c.A. ~§ 20~-219. The federal Fair Labor Standards Act (FLSA) defines the employer
see tJS. DepartnientofLabor: requirements for minimum wage, overtime compensation and compensatory
time, exempt and non-exempt status, child labor standards, and
recordkeeping in relation to these requirements.
See the LMC HR ~ Benefits Final It is a good practice for cities to review the FLSA and job classifications to
l't.SAReJ,vtar;ons. see if this federal law will impact any city employees' pay or status. If you.
have any questions about the FLSA, contact the League's HR & Benefits
Department..
n4inn. star. §§ 177.21-s3. Minnesota also has a Fair Labor Standards Act. The purpose of this act is to
See MN Department of Labor Bc establish minimum wage and overtime compensation standards, to safeguard
tndnstp~. existing minimum wage and overtime compensation standards, and to sustain
purchasing power and increase employment opportunities.
In situationswhere both the federal and the state FLSA address an issue, the
employer is required to follow the law that is of greatesf benefit to the
employee. The state minimum wage applicable for 2007 is $6.15 per hour
for most employees. (Although the federal minimum wage for most
employees remains $5.15 per hour, an employer is generally required to
follow the law that is of greatest benefit to the employee.)
Minn, Stat. § 177.24, sued. 1. According to the state FLSA, cities must pay employees $6.15 per hour or
more if the city's revenues are $625,000 or more and at least $5.25 per hour
if the city's revenues are less than $625,000.
There are a number of minimum wage exceptions to both the state and
federal FLSA. Cities are encouraged to review both laws before deciding to
compensate an employee at a rate that is less than state minimum wage
The League's HR & Benefits Department publishes a number of fact sheets
see LMe xlz mfom,at;on Memas. ~ on various aspects of FLSA, which are available on the LMC web site. The
department also provides a comprehensive human resources guide for
members, the online Muman Resources Reference Manual. The first chapters
Sec LMC xR Reforence Manual. of the LMC HR Reference Manual address hiring and termination issues and
are available on the LMC web site.
vi. Bonuses
A.G. Op. 107•a-3 (Jan. 22,19so~. The attorney general has determined that bonuses constitute a gift and are,
therefore, not lawful city expenditures. Cities, however, can have merit-
based pay systems.
Guidelines for Preparing City Budgets 2007
25
-34-
c. Deferred compensation
Generally, an employee may elect to defer specified amounts from his or her
salary under a deferred compensation plan. There is a tax savings for the
employee because taxes are not payable until the money is withdrawn. Since
most employees have a lower income during their retirement years, the
earnings will be taxed at a lower rate.
zb u.s.c.A. § as~~b~~zl. Federal law provides that a portion of an employee's wages may be paid in
the form of deferred compensation. Under section 457 of the Internal
Revenue Code, an employee may defer, on a annual basis, the lesser of:
(1) A maximum of 100 percent of the employee's gross income after
subtracting any Section 414(h) picked-up contributions (mandatory
employee contributions to 401 qualified retirement plans made with
pre-tax dollars); or
(2): Year Amount
2005 $14,000
2006 $15,000
Beginning in 2007, the contribution. limit will be increased in $500
increments. At the time this publication went out, the IRS had not
yet announced more specific increases.
'~' Although the employee contributions to a deferred compensation plan reduce
the individual's taxable income, the city will still need to budget for the
employer's share of Social Security and Medicare to the same extent that
these withholdings would be required on the employee's regular earnings.
zoos Cong. us. ii.a. i~ltzs3o ioy~ For distributions made after Dec: 31, 2006, a retiring employee may roll
Congress„ 2d Session tl. R. 2830
money from a deferred compensation plan (or a qualified retirement plan) to
an individual Roth IRA if all of the IRS requirements are met.
~Miim. Stat. § 3sti.2a, snnci. i(s~. Under Minnesota law, public employers may contribute to the state of
Minnesota deferred compensation plan in amounts provided in the
employer's personnel policy or collective bargaining agreement. This
contribution may not exceed $2,000 per year, per employee. The employee
must match any amount contributed by the employer. Although employees
may contribute to other deferred compensation plans, public employers may
only contribute amounts to the state's plan for their employees.
For example, if an employer contributes $2,000 toward deferred
compensation for 2007, the employee's contribution must be at least $2,000,
but cannot exceed $13,000 since the deferred compensation amount is
generally capped at $15,000 for 2006.
26
League of Minnesota Cities
-35-
Minn. Stat: § 353.028.
2006 Miun. Laws eh. 271, nrt. 3, Sec.
4(1 amen[ligg Iviinn. 5tnt, § 35C>.24,
subd. 1. See Rcm. Nmneral IILC.b.d
Volunteer Firefighters and Social
Security.
Minn. Staff. ~ 465.72, subd. 1.
Minn. Stat. §412,271.
Minn: Stale § 471.426..
There is special authority for cities to offer deferred compensation to city
managers or chief administrative officers. Within six months of beginning
employment, the manager or chief administrative officer may elect to be
excluded from PERA. The city may agree to contribute deferred
compensation for these individuals. Such contributions must comply with
federal tax laws. No city may make a contribution to a deferred
compensation plan for volunteer or emergency on-call firefighters in lieu of
withholding social security benefts, if applicable.
d. Severance pay.
Cities must also consider any expenditure for severance pay to city
employees. Severance pay provided for an employee leaving employment
may not exceed an amount equivalent to one year of pay.
e. Vacation and' leave
When budgeting, cities must be mindful of costs associated with employee
time off, whether the time off is for holidays, vacation, sick leave, school-
related leave, family leave, military leave or any of the other leave provisions
that may apply to city employees. Additionally,- cities should budget for the
cost of having temporary replacements for employees absent for significant
time periods:
f. Electronic fiime;keeping
Effective Apri127, 2004, cities were allowed to use electronic time recording
systems as long. as they adopt policies to ensure accurate and reliable
timekeeping and payroll' methods.
g. Mandatory direatdeposit
The 2004 Legislature:authorized a municipal governing body to mandate
direct deposit for all employees being-paid by its payroll system.
h'. Health insurance costs
In budgetiiigfor future health and dental.premiums, cities need to be aware
of underlying trends in the: cost of health and dental care. Health and dental
care costs continue to increase faster than the general rate of inflation. Health
experts and actuaries project that the inflationary cost of healthcare will
increase by about TO percent to 15 percent over the coming year, and dental
costs will increase by about 5 percent to .8 percent.
The other factor that will impact each city's health and dental rates is that of
the group's own experience. Depending on how your city is pooled with
other groups,-your claims experience may serve to increase health and dental
premiums by evenmore than the projected inflationary trends.
Guidelines for Preparing City Budgets 2007
27
-36-
For planning .purposes cities may want to base their budgets on the
underlying trend in medical costs: that is, assume health premiums will
increase no less than 15 percent by July 1, 2007 Given the particularly
volatile nature of health claims, it's probably a good idea for cities to build in
signiftcant cushion to their budgets for this line item. Premium increases of
20 percent or more are still common in the market today, although increases
seem to be stabilizing somewhat and some cities have reported lower than 10
percent increases in the past year or so.
Budgeting fora 15 to 20 percent increase is probably a reasonable approach
for all cities, regardless of your city's health insurance carrier. Cities should
talk to their individual health and dental insurance carriers about what to
expect for their next renewal. Of course, if a city caps its contribution to
premiums at a specific dollar amount, the full effect of any premium
increases will not necessarily hit the city's budget.
There .has been a general disconnect in the healthcare market between
"users" and "payers," in part because many cities still pay a significant
amount towards the premiums for certain employee benefits (health
insurance in particular). Cities may wish to review their benefit contribution
levels, and consider some mechanism of cost sharing between the city and its
employees.
In addition, many cities have implemented benefit changes to their existing
plan options and/or considered new options emerging in the market, such as
consumer driven health plans, to lower premium costs. However, any
changes to the city's benefit plan and/or to the city's contribution structure
may be limited if the city has collective bargaining arrangements. Before
changes could be made, the city would need to negotiate changes with the
union(s).
Retiree health insurance
Minn. Stat. ~ 471.61, subd. 2a. Cities may contribute towards the premiums for group insurance coverage of
retired employees. A city employee that retires-under a collective bargaining
agreement (union contract) requiring a city contribution toward retiree
insurance coverage may be entitled to that contribution indefinitely, even if
M.nn. slat. ~ t~yn.2o, subd.2a. the benefit terms are changed or eliminated under subsequent union
contracts. In some circumstances, the city may also be obligated by its own
personnel policy to continue the city's contribution toward retiree health
coverage. Cities that have collective bargaining agreements or a personnel
policy that sets forth a city contribution toward retiree health coverage may
want to consult with League HR & Benefits staff or an attorney familiar with
public sector benefits issues about long-term obligations to retirees.
Minn. Slat. § 411.61, subd. ?b (a), (b). Cities must allow certain former employees and the employee's covered
dependents to continue indefinitely in the city's health and/or dental
insurance plan(s) if the employee has met age and service requirements
necessary to receive annuity benefits from a public pension plan.
Furthermore, the employee and dependents must be pooled in the same
group as active employees until the employee reaches age 65. In addition,
cities still must make some benefit option available to retirees that are age 65
or older (i:e., the city cannot cut off benefits at age 65 for individuals that
qualify for this indefinite coverage).
28
League of Minnesota Cities
-37-
Minn. Slat: ~ 356.24, subd. t(a)(s>(ii). A city may contribute up to $2,000 for an employee into the state of
Minnesota deferred compensation plan if authorized by the city's personnel
policy or collective bargaining agreement. The employee must contribute a
Minn. Slat. $ 465.72, subd. is matching amount. This plan allows employees to build a nest egg from
which to buy health insurance coverage during retirement. Compensation for
accumulated sick leave or payments toward premiums for group insurance
policies for former employees need not be counted toward the one-year pay
limit on severance pay.
Minn. Stat. § 471.61 t, subds. 1, 2. Local governments must identify separately in their budgets the amount they
spend on health insurance benefit. payments for retirees during the contract or
policy period. The payments must be recorded as expenditures for the fiscal
year during which the payments are made. Benefits must be approved by a
separate council action if payments are for employees (or former employees}
who are not covered by a collective bargaining agreement. Employers
providing employer-paid healthcare benefits must coordinate these benefits
with Medicare.
see t1,c Goveinn,ental. Accountins In 2004, the Governmental Accounting Standards Board (GASB) issued
standards Boara. Statement No. 43: Financial Reporting for Post-employment Benefit Plans
Su,nn,anes of GASB statements. Other Than Pension Plans, and Statement No. 45.: Accounting and Financial
Reporting by Employers for Post Employment Benefit Plans Other Than
Pension Plans, establishing uniform financial reporting standards to measure
"NewGA5I3 Accounting Standards and report the long-term costs of other post-employment benefits (OPEB)
'or OPEB," Minneroui Cities (March
006
. p. 21). plans (e.g., retiree health benefits or life insurance), as well as the funding
, status of these programs. Cities typically have funded retiree benefits on a
pay-as-you-go basis, which has created unfunded liabilities that, up to this
point, have not been reflected in the cities financial reports until after
employees retire. Cities will now need to project the long-term costs of
offering and paying for these benefits for. both current and future retirees.
Virtually all Minnesota public-sector employers will have some OPEB
liability, regardless of their size, whether they contribute towards retiree
contributions or whether they currently have retirees on their health plan.
This is because of a provision in Minnesota statute that requires cities (and
other public-sector entities) to allow early retirees the option to stay on the
active employee plan until they turn 65. In Minnesota, when an employee
retires under age 65, the most the city can charge is the group premium rate
for the active employee plan. This rate is typically less than the retiree's
expected cost and creates an issue known as implicit rate subsidy, which is
considered to be other post-employment benefits under GASB and must be
quantified and reflected on the city's financial statements.
These accounting standards will be phased-in based on the revenue of the
employer. By Dec. 15, 2007, all cities must follow GASB No. 43, By Dec.
15, 2008, GASB No. 45 will. apply to all employers. Cities should take steps
now to comply with these. complex new standards. Contact the League's HR
& Benefits Department for more information. If a city does not comply with
the new reporting standards, 'its bond rating and ability to raise capital in the
market may be negatively impacted.
A city may find that it needs to hire an actuary in order to project the future
costs of offering and paying for retiree benefits. Cities should consider the
additional cost for hiring. an actuary as they prepare their city budgets.
Guidelines for Preparing Ciry Budgets 2007
29
-38-
In addition, while the GASB rules don't actually require that the Iiability be
funded, the new standards will likely create pressure for cities to do so
because of the effect unfunded liabilities might have on the city's bond.
rating. In preparing their budgets, cities will need to think about whether and
how they're going to fund this liability, as well as the potential costs
associated with negotiating different retiree benefits as part of the union
contract so the city is not continuing to incur future liabilities for current
employees.
C. .Pension and retirement costs
Cities should budget for the cost of making required employer payments to
the pension and retirement plans of city employees. The various costs can
include Social Security and Medicare, Public Employees Retirement
Association (PERA), volunteer firefighter relief association, ambulance
personnel retirement, and police and paid firefighter relief associations.
Additional retirement system costs may also be considered, such as staff time
to do paperwork, reporting, and training of responsible staff.
1. Public Employees Re#irement Association
The Public Employees Retirement Association (PERA), a public pension
system, covers almost all regular, non-seasonal city employees in Minnesota.
Exceptions include most volunteer firefighters and election officers. .
Employees must belong to the system; contributions from the city and from
employees are mandatory. Cities, as employers, are entrusted with the
responsibility of enrolling all employees who qualify for membership, and
are legally required to remit contributions on apay period basis:
PERA provides a variety of employer services, including a PERA Employer
see r>:aA emrteyer M~n,etil. Manual and an Employer Response Line. The PERA Employer Manual
contains comprehensive information about PERA and its policies and plans,
and is available on the PERA web site. The Employer Response Line can be
reached by calling toll free (888). 892-7372 or (651) 296-3636.
a. Eligibility for participation
Minn. Stat. $ 353.01, s~aa. gin. Whether an employee is included in a PERA defined benefit plan depends on
see F~Exa. Employer Ma,~uai. whether the employee meets the statutory definition of an included or an
excluded employee. Generally, most local government employees are
required to participate unless they are specifically excluded: For further
information on employee eligibility, see part five of the PERA Employer
Manual.
PERA administers defined benefit plans and defined contribution plans..
3D
League of Minnesota Cities
-39-
b. defined. benefif plans
Deftned benefit retirement plans are known as such because members'
benefits are computed using a formula and are not based on the amount the
member contributed to the plan: PBRA has four types of defined benefit
plans: Basic, Coordinated, Correctional, and Police and Fire. The Basic Plan
closed to new members, in 1968 when Social Security coverage became
sec rERA Empi°yer Manual. available for most city employees. Generally, all new city employees, other
than fire and police officers, participate in the Coordinated Plan. For
descriptions of the plans, see part three of the PERA Employer Manual.
c. Defined contribution plans
A defined contribution plan (DCP) involves contributing into a retirement
account, which the employee will receive in lump sum upon application.
Defined contribution plans include plans for elected officials and plans for
see eEr~ En,pioyer Manual. volunteer ambulance personnel. For a description of defined contribution
plans,. see part. four of-the PERA Employer Manual
d. Employer contribution rates
Employers are required to withhold employer and employee contributions, at
rates established by statute. Employer contribution under the basic and
coordinated plans includes both a match to the employee contribution and an
see PERA Employer Manaal, additional employer contribution. For further information on contribution
rates.. and reporting, see. part seven of the PER.A Employer Manual.
The following summarizes employer and employee contribution rates:
;, ,.
Plan Employer's Employee's
Contribution Contribution
Basic plan 11 78%'"' 9.10%
i/, coordinated Plan 5..53% 5.10%
- ~Folice &~.~ire Plan 9.30% 6.20%
Correcf-onal Plan ` 8.75% 5.83%
DCP-Elected Officials 5 00% 5.00%
DCP-Physicians 5.00% 5.00%
DCP-Ambulance Set by :employer Set by employer
e. Pension contribution-increases- continue
The 2005 Legislature passed abate-bones pension bill that included
employee/employer. contribution increases to the. PERA Coordinated Plan
.and the PE]tA Police and Fire Plan. This incremental contribution increase
continues in effect for 2007.
Guidelines for Preparing City Budgets 2007
31
-40-
Aaron. srai. g 3s3 ~~. Under the Coordinated Plan increase, both employee and employers share a
phased-in contribution rate increase. The employee contribution rate
increases by 0.25 percent of salary between January 2007 and January 2008.
Mm°. Stat. 5 353.65' Employer contribution rates increase by .75 percent of salary between
January 2007 and January 2010. Contribution rates for the Police and F ire
Plan will also increase incrementally beginning in 2006.
The following tables summarize the 2007 contribution increases in these two
plans:
Coordinated Plan Rates
Date of Increase Emplovee Rate E~lo er Rate Total Rate
Jan. 1, 2007 5.75% 6.25% 12.00%
Jan. 1, 2008 6.00% 6.50% 12.5:0%
Jan. 1, 2009 6.00% 6.75% 12..75%
Jan. 1, 2010 6.00% 7.00% 13.00%
Police and Fire Plan Rates
Date of Increase Emplovee Rate Employer Rate Total Rate
Jan. 1, 2007 7.80% 11.70% 19.50%
Jan. 1, 2008 8.60% 12.90% 21.50%
Jan. 1, 2009 9.40% 14.10% 23.50%
2. Volunteer firefighters' relief associations
See LMC research memo 220e.3, If there is a volunteer firefighter relief association, the city clerk will need to
Organizaliott and Operation ojihe
Ret;ej,4ssociatintt,
be familiar with the laws regarding these types of pensions. Each firefighter
relief association must have a board. Three trustees on that board mustbe
city officials from the city served by the fire department and directly
connected to the relief association. These officers have a fiduciary
responsibility to the members of the retirement plan. The city may also have
a financial responsibility to support the plan, so it is important for the city to
be aware of the amount it may need to budget for this obligation.
N[inn. SI<tl. o aza~.oz, $~bd. 3. .Officers of all volunteer firefighters' relief associations that are subsidiary to
A1imt. Stat. ~ 69.77?, snbd. a. a city fire department must certify the association's financial requirements
for the coming year to their. city councils. This must be done each year by
Aug. 1. These financial requirements include the current or normal costs and
amortization of any pension fund deficit. These amounts. are determined
differently depending upon whether the association pays alump-sum service
pension or a monthly benefit service pension. Cities should note the
minimum and maximum amounts that can be paid to retired volunteers are
being increased over the next several years. These increases are discussed in
further detail later in this section.
32
League of Minnesota Cities
-41-
Minn. Star. $ 69.774, snua.a. Relief associations that are subsidiary to independent, nonprofit fire
departments must pay the financial obligations of the special retirement fund
and the cost of any actuarial survey from the proceeds of their firefighting
contracts. A city would have no direct f nancial obligation to support the
retirement systems of an independent fire department. The amount of the
obligation for the independent fire department, however, will likely affect. the
price of the city's fire protection contract with the independent department.
Minn. star. 8 azaA.or. Every volunteer firefighter is eligible for membership in a relief association.
Persons serving in fire prevention positions are now able to participate if
approved by the city or independent fire department. The association may
-
not eligible to participate
not approve an application from a person who is
under state law.
ldinn. Star. § 424A.02. Most relief associations provide for retirement after 20 years of active
service with the fire department, 10 years of membership with the relief
association, and 55 years of age. Members may be entitled to partial vesting
in five years. Special laws permit full vesting after five years for some plans.
Minn. Stat. ~ 424A,02, snia. 2. A relief association may pay a reduced service pension to a retiring member
who. has completed fewer than 20 years of service. The reduced service
pension may be paid when the retiring member meets minimum age and
service requirements. The non-forfeitable percentages of the pension
amounts starts at 40 percent with five years of oompleted service and
Minn. Slat: § 424A.02, suua. z gradually increases to 1;00. percent with 20 years of completed service; except
that for a relief association that pays a defined. contribution service pension,
the non-forfeitable percentage reaches 100 percent with 10 years of
completed service.
League of Minnesota Cities Additional. information on volunteer firefighters' relief associations is
Office of the State Auditor available from the League of Minnesota Cities, the Office of the State
Auditor, or the Legislative Commission on Pensions and Retirement.
Legislative Commission on Pensions c~
Refirement, -
a. '~ Lump-sum benefit plans'
Minn. Stat. § 69.772, snug. 3. Relief associations that provide for the payment of lump sum pensions
should include the following in the certification of financial requirements:
• The. overall funding balance of the special fund for the current calendar
year.
• The financial requirements of the.specal fund.
• The minimum obligation of the municipality:.
n4inti. star. ~ 69.772. The statutes specify how this data should be calculated. Contact the League
or the ivlinnesota.Deparfinent of Revenue for further information.
Minn. Slat. § 69.772, snug. z. Relief association officers should determine the dollar amount of accrued
liability for each member. The accrued liability is based on the number of
years'of active service for each member (can•ied to the nearest.full year). To
determine the accrued liability, use the statutory chart provided in Minn.
Slat. §-69.7?2 subd: 2
Guidelines for Preparing City Budgets 2007
33
-42-
The accrued liability for each member is calculated by multiplying the
accrued liability from the statutory chart by the ratio of the lump sum service
pension amount currently provided for in the bylaws of the relief association
to a service pension of $100 per year of service. For example, if the
association pays $50 per year of active service, the liability would be one-
halfthe amount in the table; if the association pays $200, the dollar amount
of liability is double the amount in the table.
The dollar amounts for lump sum service pensions effective Dec. 31, 2003,
are laid out in a table is Minn. Stat. § 424A.02, subd. 3(d) as follows:
Minn. Stat. $ a24A.02, s°i,a. 3~d1. Minimum Average Amount of Maximum Lump Sum Service Pension
Available Financing per Amount Payable for Each Year of
i. Firefighter Service
$3,831 $7,100
$3,885 $7,200
$3,939 $7,300
$3,993 $7,400
$4,047 $7,500
Mim,. Slat. § a24A.02, subd. 8(bl as A relief association that has a pension plan qualified under federal tax code,
nmended by 20oG Minn. Lays ck,. 271,
art. 13, seo .3. and that provides a service pension, may transfer an eligible member's lump
sum pension (or the death, funeral, or survivor benefit attributable to the
zei ti.s.c:A. § aos, member) to that person's IRA at the written request of the retiring member. If
the active member dies, the transfer can be done at the written request of the
deceased member's surviving spouse as long as the transfer complies with
federal tax laws.
Minn. st<~t. ~ 4zaA.oz, subd. to. If the relief association bylaws are amended, the relief association must file a
copy of the revised bylaws with the state auditor. Failure to do so means a
loss of state aid.
b. State supplemental benefits
Minn. sloe. ~ az4A.lo, snbd. z. A state supplemental benefit is available to volunteer firefighters who
receive lump sum benefits. The supplemental benefit is 10 percent of the
recipient's lump sum distribution, but is limited to $1,000. The relief
association pays for the benefit. The commissioner of Revenue reimburses
the relief association by March 15 of each year for the total amount of
supplemental benefits paid during the previous calendar year.
zooti Min,,. Laws ch. z; ~, arr. ~ 3, sec.
5 amend,'ng Minn. slat. § 424A.10, If a relief association bylaws or articles of incorporation allow it, the
subd. 1 and 2. association ma a a su lemental survivor benefit in addition to the lump
y P y PP
sum survivor benefit. The supplemental survivor benefit may go to the
legally married spouse of a deceased volunteer firefighter, or, if none, to the
surviving minor child or minor children. The supplemental survivor benefit.
is limited to 20% of the regular survivor benefit or funeral benefit, but must
not exceed $2,000.
n4inn. Stat. $ 424A.10, s°bd. 4. Cities receive a form (Form SBR) each November that must be filled out by
For further information, call the the relief association. The form must be submitted to the Department of
Department of Revenue Property Tax Revenue each .year by Feb. 15 in order to receive reimbursement. The
division ar ~6st~ z96-stal, supplemental benefit is in lieu of the income tax exclusion for lump-sum
distributions.
34
League of Minnesota Cities
-43-
c. Monthly benefit plans'
Minn. Stat. § 69.773, subd. z. Relief associations that provide monthly benefit pensions must determine the
financial. requirements of the special fund based on the most. recent actuarial
valuation: The relief association should include a copy of the actuarial survey
with the certification of financial requirements, An actuarial survey is
-required every four years, or whenever. the benefits schedule in the bylaws
change,.
Minn. Stat. § 424A.02, subd. 3.
tvlinn. Stnt. § 424A.02, subd. 3(c),
Minn. Staff. § 69.772, subd. 6.
As with the lump-sum plans, the statutory amounts for monthly service
pensions have. expanded over the last several years.
The dollar amounts for monthly benefit service pensions are laid out in a
table in Minn. Stat. § 424A.02, subd. 3(c) as follows:
Minimum Average Amount of Maximum Service Pension Amount
Available Financing per Payable per Month for Each Year
i. Firefighter of Service
$4,212 $52.00
$4,374 $54.00
$4;455 $55:0.0..
$4,536 $5:6.00
d. Bylaw changes and benefit increases
Bylaw ofianges can have. a significant impact on the relief association's
retirement benefits. In most cases, the city council must approve these
changes before they can take effect. The council should consider such
changes only if they are needed to attract volunteers. The council should
have the city clerk or other qualifed fnancial expert review the financial
implications before ratifying the changes. Failure to properly calculate the
special fund :requirements could cause the special fund to run short. This
could result in personal liability for the officers of the relief association or
require the city to substantially increase its tax levy for the relief association,
or both.
In some cases, relief associations may increase benefits without council
approval. Relief association articles of incorporation or bylaws that affect
benefits may be amended without council ratification if both the following
requirements have been met:
Guidelines for Preparing City Budgets 2007
The assets of the relief association exceed its liabilities by at least 10
percent as .shown on the association's last annual report.
The city is not required to contribute more than 2 percent aid due to the
changes in benefits that vril] cause the relief association to exceed the
expected amountof future state aid.
35
-44-
ivhnn. star. 9 v9.n2, subd. a. If the relief association special fund is derived in substantial part from non-
tax revenues, the city might be wise to let the association increase the benefit
amount without council ratification. If the non-tax revenues decrease in the
future, the benefit level would drop back to the last ratified amount. This will
ensure the proposed increase will not commit the city to a program it cannot
reasonably afford.
Minn. Stet. § 349.12, subd. zs(b)~6>• An example of the above situation is the impact from the 1993 law that
Minn. stet. ~ 4~1.6tst, prohibits using contributions of lawful gambling money for the benefit of a
retirement fund. Many cities that had allowed contributions of this sort to
help fund their relief association retirement plans found they had to budget
extra money to maintain ratified benefit levels.
A4inn. scat. 0 424A.tl2, subd. 3 Cities should make sure a benefit increase does not exceed statutory limits
Minn. stet. fi aa4>!,.oz, snbd. 3a, that exist for volunteer firefighter benefits, The maximum and minimum
amounts have increased over the last few years. Payment of benefits in
excess of statutory limits can result in loss of fire state aid.
3. Ambulance personnel retirement
There are several retirement benefit possibilities for ambulance service
personnel. They include the following:
tvLinn. S43t. §§ 144E.40..48. • Ambulance longevity award There is a special trust fund that provides
Contact the Department of Health at lump sum benefits to ambulance service personnel upon the completion
~6sll zts-sso3 forfurtnerinformation. of their ambulance service careers. This longevity award in administered
by the Department of Health.
A4inn. Slat. § 353.86. • PERA Defined Benefit Plans. PERA generally prohibits volunteer
contact rsxa, at ~6s l~ z96-~a6o or ambulance personnel from participating in the Basic, Coordinated, and
soo-6s2.9o26 for farther information.. Police and Fire retirement plans. However, ambulance personnel who
are eligible to participate in one of these PERA plans because of other
employment may elect to participate in that same fund with respect to
compensation received for providing volunteer ambulance service.
Minn. Slat. § 3531).08. • PERA Defined Contribution Plan. PERA includes a defined
contribution retirement plan for personnel of publicly operated and
publicly subsidized ambulance services. PERA is accepting local plan
applications for review.
see Deferred Compensacion discussion
above. , beferred compensation. Deferred compensation would appazently be an
available option in the same way that it is for other public employees.
But this option may not be meaningful if ambulance volunteers are paid
nominal amounts for their services.
• Special legislation. Cities can seek special legislation for other
ambulance service retirement possibilities.
4. Police and paid firefighter relief associations
Mi»". stay. , fiy.~~. Some cities have local relief associations or retirement funds with members
who are employed by paid or partially paid departments. These cities must
budget for their financial responsibilities to these pension plans.
36
League of Minnesota Cities
-45-
n4inn. s,ar. § 69.77, sand. s. Officers of these relief associations must certify the financial requirements
and minimum obligation of the association for the following year between
Aug. 1 and Sept. I, The certification must include an amount sufficient to
retire the unfunded accrued liabilities of the association by the date specified
in the law that applies to the association. The officers of these associations
have a fiduciary responsibility to the members of these plans.
Ltinn. Stat. & 69.77, sand. 7. If a city does not include the full amount of the minimum obligation in its
hli,tn. Stat. § 69.77, 5und. a. levy for any year, the officers of the association must certify that amount to
the county auditor who will spread the levy in the amount of the obligation.
Money paid by the city in excess of the minimum required will be applied to
reduce the association's unfunded liabilities.
Mimi. Stet. § 69.77, sand. to. These relief associations must also obtain an actuarial survey as of Dec. 31
Minn. Stat. § 356.215, Saba. a, of every year. Actuarial valuations must be made in accordance with state
statute.
Minn. sett. § 69.72 The state auditor and the commissioner of the Department of Revenue
determine if a city or relief association has complied with all the relevant
provisions of the laws. Failure to comply with the applicable laws will result
in loss of state aid.
5. Fiduciary responsibility and other reporting
see Minn. stat. en, ss6A. Persons involved with pension funds have a fiduciary responsibility to the
members of the pension plan. These persons include pension fund
administrators, board members, and investment advisors, among others.
Because of this responsibility, there are strict statutory directions as to what
these individuals can and cannot do. For instance, the law prohibits personal
profits from investments; requires filing statements of economic interest,
limits types of investments for small funds; prohibits some types of
transactions; applies the open meeting law to board meetings, including the
boards of volunteer firefighters' relief associations; requires continuing
education for fiduciaries; and sets other requirements. There are also some
restrictions as to who may not serve as a fiduciary.'
Minn. Stxt, § 424A.U5, sttna. 3(a)(6>. The state auditor holds an annual workshop for Minnesota public pension
fund officers. Relief associations can budget money from the special fund to
send the clerk or other officer to this workshop. This workshop offers an
opportunity to meet most fiduciary education requirements.
Minn. Stat. § s.ss. The Legislative Commission on Pensions & Retirement may request and
Minn. Sta,. ~ 69.osi. .receive any data on police or fire relief associations. The state auditor has
authority to audit relief associations annually, but may contract with. a
certified public accountant for the audit.
I+4inn. Stnt.. § 424A..05, sand. 3(n>(6). Relief association funds may be used to pay for audits. This is an authorized
Mimt. stat. ~ 69so, special fund expense. The cost of an audit may also be paid from the
association's general fund if allowed by the bylaws.
Minn. Stat. § 424A.0G, Saba. 3.
Guidelines for Preparing City Budgets 2007 37
-46-
The state auditor must file a financial compliance report with the
commissioner of Finance and with each relief association. The state auditor
must also notify the Legislative Commission on Pensions & Retirement if the
audit reveals malfeasance, misfeasance or nonfeasance in office, or if the
relief association has not filed its annual report each year by March 15.
2006 mlinn.l,aws ch. 272, art.. 6, Sec. i The state auditor must make any public information on fire relief pension
and 2 uni~nding tvtinn. Slat. g3Sb.219,
gilding snbd. 9 and io accounts available to individuals or organizations that request it. The state
auditor may charge fees to cover the cost of providing the requested data in
usable formats. Also, the state auditor must now provide a detailed analysis
of each pension fund, including one and fire-year rates of return for each
pension fund and the benchmark rates of return for each fund. (A benchmark
in this context is a standard measure of investment performance used to
compare rates of return.)
Minn. Slat. ~ (19.051, sttnd$. i, ta. The boards of all salaried relief associations and all volunteer firefighters'
relief associations with assets of liabilities of at least $200,000 must prepare
an annual statement of financial affairs that must be certified by an
independent public accountant or the city's auditor. These statements must
be filed in the relief association's office and be submitted to the city council
and the state auditor.
Minn. Slat. § 69.051, Saba. 2. The treasurer of the volunteer firefighters' relief association must be bonded
in an amount equal to at least 10 percent of the assets of the association. The
amount of the bond need not exceed $500,000. The relief association board
determines the amount. The city council determines the amount for paid
firefighter and police relief associations.
Minn. Slat. 5 :156.219, snbds. 1, 3. Any public pension fund not fully invested through the state board of
investment, including a firefighters' relief association, must report certain
detailed investment information to the state auditor. The reports must include
investment policy changes and the effective date of each policy change. The
2006 Minn. Laws ch. 271, art. 8, seo. a state auditor requires additional reports from pension fund investment
and S crnuatdinl; Minn. Stal. §356.219,
sutxl. 3 and 6. portfolios that are earning well below market rates of return after four years.
Minn. Slat. § 356.219; sated. 3~d1. If the public pension plan has a total market value of less than $10 million,
the-report must include the amount and date of each portfolio injection and
withdrawal, as well as the market value of the total portfolio at the beginning
of the calendar year and for each quarter.
Mion. Slat. § 356.219, subd. 3(h), ~~>. If the public pension plan. has a total market value of $10 million. or more,
the report must include the market value of the total portfolio and the market
value of each investment account, investment portfolio or asset class-
. included in the pension fund as of the beginning of the calendar year and for
each month, as well as the amount and date of each injection and withdrawal
to the total portfolio and to each investment account, investment portfolio or
asset class. The report must also include a calculation of the total time-
weighted rate of return available from index-matching investments assuming.
the asset class performance targets and target asset mix indicated in the
written statement of investment policy:
38
League of Minnesota Cities
-47-
6. Social Security and Medicare
See 1RS Circulaz E, Eruployers' •rax Currently, the Social Security withholding rate for 2006 is 6.2 percent of an
Guide (nts Pubsoation ls)' employee's wages on all earnings up to $94,200. The employer must
contribute a matching amount. The Medicare withholding rate for 2006 is
1.45 percent on all earnings without limit. Again, the employer must
contribute a matching. amount.
There are three different possibilities of withholdings of Social Security and
:Medicare. An employee will have one of the following possible withholding
situations:
+ Both Social Security and Medicare are withheld.
• Neither Social Security nor Medicare is withheld.
• .Only the Medicare portion is withheld.
(NOTE: In no case would any employee have only the Social Security
portion withheld.)
The following chart summarizes required withholdings:
Twe of Plan Social Security Medicare
No qualified plan Yes Yes
Coordinated Plan Yes Yes
Basic Plan
Hired on or before 3/31/86 No Yes
Hired on or before 3/31/86 and
elected Medicare participation No Yes
in 10/89 referendum
Hired after 3/31/86 No Yes
Police & Fire Plan
Hired on or before 3/31/86 No No
Hired after 3/31/86 No Yes
Election officials
Paidless than $1,300 per year No No
Paid $1,300 or more per year Yes Yes
a. Medicare and Social Security withholdings
26 v.s.c.A. § 3i21(n)(~)(~). Determining the category for each employee is no easy task. Generally, a
az us.c.A. ~ ai o (a)(7)(r). public employee who is not participating in a qualified retirement system
through his or her employment is subject to both the Social Security and the
Medicare withholdings.
Guidelines for Preparing City Budgets 2007
39
-48-
The retirement plans offered through PERA have been deemed "qualified"
retirement systems.. Thus, employees who are not participating in PERA
(such as some elected officials and part-time, seasonal or temporary
employees) might fit into the category of those having both Social Security
and Medicare withheld.
It is important to remember that employees who are members of the PERA.
Coordinated Plan will also have Social Security and Medicare withheld, even
though they are participating in a qualified plan. This is because participation
in Social Security and Medicare is included as part of this particular
retirement system.
b. Exempt from withholdings
zz< u.s.c.A. § slzi (b)(7)(F)(iv). There are very few exceptions to the above general requirement. The one that
4z u.s.c.A. § alo (a)(7)(F)(iv). is most applicable to cities is the exemption from both Social Security and
Medicare withholdings for election workers who are paid less than the
See IR5 Circular E, Employers' Tax threshold amount of $1.,300 in 2006. This amount is annuall ad usted. At the
Guide (Ills Publication 15). 3' ~
time of publication, the threshold for 2007 had not been established. (A note
of clarification: Election worker pay is not subject to federal or state taxes
but if an election worker is paid more than $1,300 in 2006, the city must
withhold Social Security and Medicare for that individual.)
There are also a few individuals participating in qualified plans whose
earnings may be exempt from withholdings, depending upon their date of
hire. This possibility is described in more detail in the next paragraph.
c. Medicare withholdings
Employees who are participating in a qualified plan are exempt from the
Social Security withholdings, but some of these employees may still be
subject to the Medicare withholding, depending upon the employee's date of
hire. If the employee was hired after March 31, 1986, Medicare must be
withheld. If the employee was hired on or before March 31, 1986, and is
participating in a qualified retirement plan, the employee's earnings are
exempt from this withholding, unless the employee chose to have Medicare
withholding during an election option that was given in October 1989.
Employees who might fit into the category of having only the Medicare
portion withheld would include PERA Basic Plan members and PERA
Police and Fire members hired after the above-date. Also included would be
any Basic Plan members hired on or_before March 31, 1986, who opted for
Medicare participation in the October 1989 referendum. If you are unsure of
a Basic Plan member's status with regard to the 1989 referendum option,
contact PERA.
Although no new members have been eligible to join the PERA Basic Plan
since 1968, members who were participating were allowed to continue. In
such a situation, the Basic member who has left employment with one city
for a job with a different city would be seen as a new hire and Medicare
withholdings would be required. Under certain conditions, this type of
employee would be allowed to continue his or her participation in the PERA
Basic Plan.
40
League of Minnesota Cities
-49-
d. Volunteer firefighters and Social Security
Cities have many questions about the applicability ofSocial Security and
Medicare withholdings to volunteer firefighters. There are essentially two
issues surrounding this matter. One must. first determine whether a volunteer
firefighter is an employee. If so, one must then determine if the volunteer
firefighters' relief association plan would be a qualified retirement plan
under the IRS criteria:
First, is a volunteer firefighter an employee? If the volunteer is compensated
only as a reimbursement for actual expenses incurred, prior IRS rulings
suggest the volunteer would not be viewed as an employee and withholding
would not be required. If the compensation is a result of anything that is not
justifiable. reimbursement (i.e., supported by receipts for the expense), the
compensation may constitute a wage. In other words, the IRS could see the
individual as a paid employee rather than a true volunteer, and withholdings
would. likely be required.
While some IRS rulings indicate earnings of a nominal amount would not
constitute a wage,, there is no clear definition of a "nominal amount." Cities
'may want to err on the side of caution and make withholdings on any
earnings close to minimum wage.
ze crx § si s~z~rox7~-~zxdl(21. The second issue is whether a volunteer firefighters' relief association plan
would meet the standards necessary for it to be deemed a "qualified" plan
under IIZS regulations. It does not appear that these plans are sufficient. to
meet the standards becausethey fail'to meet the 100 percent non-forfeitable
benefit requirement necessary for part-time, seasonal, and temporary
employees, This equirenent means thatthe plan must allow the retirement
withholdings to fie returned to the employee if the employee has not yet
vested 100 percent. Relief association retirement plans do not allow this type
of refund and do not fully vest until a firefighter has participated for many.
years.
Although-there is, an, exception to withho]dings for employees hired
temporarily to handle disaster emergencies, this would not appear to exempt
volunteer firefighters from Social Security and Medicare withholdings. The
ongoing and continuous relationship volunteer firefighters have with their
cities in providing firefighting services. probably precludes a "temporary"
relationship.
Fire departments and relief association plans can differ substantially from
city to city in Minnesota. Because of these differences, a city will have to
look closely at its particular situation to determine whether or not its
volunteer firefighters would be exempt from withholdings. Cities that believe
they have special circumstances may want to request a revenue ruling or a
private letter ruling from the IRS'. (There may be a Fee for such rulings.)
Guidelines for Preparing City Budgets 2007
41
-50-
e. W-2 reporting of Social Security and Medicare
z~ vs.c.A. § sa~~ira~. Generally, all city employees, including elected officials and firefighters,
should receive a W-2 form after the end of each year. The W-Z is a statement
of the employee's earnings and withholdings for the year. City employees
should not receive IRS Form 1099, which should be given only to
individuals who have an independent contractor relationship with the city.
See [RS Circulaz.C, Employers' Tax According to IRS Circular E, an IRS Form W-2 is not required for election
Gniae Arts R,hucadon Isl. workers who are paid less than $600 in a year. As noted above, federal
withholdings are not required for election workers who are paid less than
$1,300 in 2006.
f. .Government pension offset
Social Security Protection Act of 2064, The Social Security Protection Act of 2004 contained a provision that
Pnb. L. ivo. ios-2o3. eliminates the "last day covered employment exemption" to the government
pension offset (GPO). The GPO provision reduces the amount of a spouse's
or surviving spouse's benefit bytwo-thirds of the amount of that person's
government pension if the government employed the person and the
employment was not covered by Social Security. Previously, an individual
was exempt from the GPO if his or her last day of government employment
was in a job covered by both Social Security and the government pension
system. The new law requires that the last 60 months of a person's
government employment before retirement be covered by Social Security
and the pension system in order to avoid reduction under the GPO.
Sncial se~~r;ry Adtni~,istration . For more information, visit the Social Security Administration web site
(click the "Federal, State & Local Government Employees" link on the right
side of the home page).
D. Fees, dues, and insurance costs
Cities should budget for fees, dues, and insurance costs.-
1. State fees
Cities should budget for state fees that might affect city expenditures, such as
permit fees and audit fees.
a. State fee increases
The 2003 Legislature enacted a number of significant fee increases that may
continue to impact cities. The bulk of the fee increases impact criminal
justice and health and human services. The state continues to look towards
fees as a possible source of revenue.
Fee increases that might impact cities include:
• Criminal justice. agencies will pay the Department of Pubiic Safety a fee
for providing secure dial-up access to criminal justice data.
42
League of Minnesota Cities
-51-
• A 7 percent increase in 911 telephone bills will finance the debt service
on revenue bonds for early phases of the build-out of the statewide
public safety radio communications system.
• Stormwater permit fees are set at $400 for construction and industrial
permits and no charge for MS4 (municipal separate storm sewer)
permits..
• Groundwater use permit fees are increased significantly to provide
resources to avoid additional reductions in the Department of Natural
Resources, Waters Division.
Minn. Stat. Chapter 6 • At the time of this publication, it is not known what increase in audit
fees the state auditor's office. will charge, if any, to local units of
government in 2007. The Audit Practices Division has a statutory
obligation to charge enough in fees to cover its costs. Audit fee increases
must be approved by the Department of Finance.
b. MPCA"wastewater treatment fees
contact the MPCA at (6s1) z96-zz~a Cities should consider the cost of Minnesota Pollution Control Agency
or 1-Boo-6a6-6za7 for further (MpCA) waterquality permit fees. Such fees may apply to city wastewater
information.
treatment facilities. Fees for permits regulating surface water discharge are
Minn. R. ~ooz.ozio-.o3ta. found underlvlinn. R. 7002.0210 to 7002.0310.
Z. Contracting costs
Cites should budget for costs associated with municipal contracting.
a, Competitive bidding threshold
Minn. srat. g apt sas The competitive bidding threshold for all cities;, regardless of size, is
$50,000:
b. Web publication
Minn. scat. ~ 33r,a:o3. Local governments can use their web sites or recognized industry trade
journals to disseminate solicitations of bids or requests for
information/proposals. Six months~after designating such a dissemination
method, a city may use the method as an alternative to (rather than in
addition to) statutory newspaper publication requirements.
c. Contracting flexibility
Minn. Stat. $ 471.345, snbd. is. The 2004 Legislature authorized cities to purchase supplies, materials, and
equipment using an electronic.;purchasing process in which vendors compete
to provide the supplies, materials or equipment at the lowest selling price in
an open and interactive environment: The legislation also clarifies that cities
may accept bids, quotes, and. proposals electronically and use electronic
bidding to sell surplus supplies, materials, and equipment.
Guidelines for Preparing City Budgets 2007
43
-52-
3. Association dues
Cities should include membership dues paid to organizations in their
budgets.
a. League of Minnesota Cities
League dues are computed using the city's latest population estimate and the
Board-recommended dues schedule (population estimates are provided either
by the state demographer or the Metropolitan Council). The Board will not
set the dues schedule for dues payable Sept. 1, 2007, until late summer 2007;
therefore, cities must budget for dues based on assumed dues and population
changes. Many factors influence the Board's decision when setting dues,
including cities' financial situations, inflation, strategic plan initiatives, non-
dues revenue sources, etc. To estimate dues payable Sept. 1, 2007, cities
should complete the following three steps:
• Estimate their city's population through 2006.
• Use this estimated population with the maximum 2006 schedule
(printed below) to compute dues payable Sept. 1, 2006; and then
• Increase the amount computed in the previous step by an assumed
dues increase ranging from 2 percent to 5 percent on Sept. 1,
2007(the average dues increase over the previous 10 years is 2.8
percent)
If you need assistance estimating population or dues, call the League's
finance director at (651) 215-4021 or 1-800-925-1122.
To fund existing services and new strategic initiatives, the Board is
proposing a maximum dues increase of 3.5 percent for dues payable Sept. 1,
2006 that is reflected in the below schedule.
i. Maximum dues payable Sept. 1, 2006
Contact the League's linance director Population Amount
with questions about LMC dues.
249 or less
250-4,999
5,000-9,999
10,000-19,999
20,000-49,999
50,000-299,999
300,000 and over
$300
$105 plus 79.42 cents per capita
$829 plus 64.92 cents per capita
$1,796 plus 55.24 cents per capita
$6,133 plus 33.54 cents per capita
$18,153 plus 9.51 cents per capita
$30,573 plus 5.37 cents per capita
44 League of Minnesota Cities
-53-
In addition to basic membership services, the League offers some services
that are not covered by dues. If a city plans to use these services, it should
include them in its budget. Such services include: conferences, ordinance
codification, personnel training, and certain publications.
4. Insurance expendifiures
Most cities are members of the League of Minnesota Cities Insurance Trust
(LMCIT) for property, liability, auto, and workers' compensation coverage.
If your city purchases insurance from a private company, you should ask
your provider about insurance coverage options
In budgeting for premiums, it's very important to keep in mind that besides
looking at the rates, you also need to take into account any changes in your
exposures (i,e., payrolls, city expenditures, property values, etc.) and any
changes in your city's experience rating, since those factors will also affect
the city's premium costs.
See LMCIT memo, c~;ry B»agcr coca' The following is LMCIT's best estimate for what might be seen in premium
u»dr 19Cf%'Preiniuni.c rates for 2007. These are very preliminary projections and are absolutely not
guarantees. LMCIT needs to conduct actuarial reviews and rate development
work and get a firm indication of what reinsurance costs will be before
giving any definite answers on premium rates for 2007. The final results
could look very different. Cities may wish to check back with LMCIT in the
fall for an updated outlook on premiums.
a. Liability
In general, liability loss costs seem to be holding relatively stable. LMCTT
hopes to be able to keep liability rates flat or to a modest increase. For
budgeting purposes, a reasonable approach might be to assume a liability rate
increase in the 2 percent to 4 percent range.
b. Property
Reinsurance costs are a much more important factor in property than. in
liability. Property reinsurers recently have been. increasing their rates, largely
in response to the enormous hurricane losses in 2005, and we expect that
trend to continue or even accelerate. LMCIT suggests cities be cautious and
budget fora 7 percent to I 0 percent rate increase.
c. Auto
Auto liability and physical damage loss patterns have been stable. LMCIT
expects a flat to moderate rate increase and suggests cities budget fora 4.
percent to S percent rate increase.
Guidelines for Preparing City Budgets 2007
as
-54-
d. Workers' compensation
Medical costs have been increasing sharply for several years and that trend is
continuing. Medical costs are now the single biggest component of work
comp loss costs, so this ongoing trend will continue to put pressure on work
comp premium rates as has been the case for several years. LMCIT will
know more by late summer when it completes the actuarial review, but right
now it looks like cities should be prepared for another work comp rate
increase that could be in the 7 percent to 10 percent range:
There's one more factor to consider this year. In addition to looking at the
overall rate levels, for 2007 LMCIT will also be revising the relative levels
of rates for the individual payroll classes. Rates for some classes will likely
increase while others decrease. This means individual cities will be affected
differently, depending on the city's individual payroll distribution. If an
individual city happens to have more than an average amount of payroll in a
classthat's increasing, any overall rate increase will affect that city more
than the average. In light of this possibility, cities may want to be even a bit
more conservative in budgeting for 2007 work comp premiums.
E. Tax costs
Cities should budget for costs associated with. federal and state taxes.
1. Federal taxes
a. Federal excise tax
zb c.r.R. § as.azzl-5. Many products are subject to federal excise taxes. (Excise tax means an internal
26 U.S.C.A.~~'~ a071(a); tax imposed on production or use of goods in a country.) However, cities may
ti41G(U)(a)(ii) 26 U.S.C..4. §§ a2S1 be eligible for refunds or be able to purchase some of these goods tax-free. For
repealed, in relevarrt part, by
' example, cities are exempt from having to pay federal excise tax on the
elephone Lxcise Tax Repeal Act
9
of 201)5. H.R. 1895,1x9°~ Cong. 1 "`
purchase of tires. Local governments were previously exempt from the 3
Secs. (zoos). percent federal tax on long distance communications, but this federal excise tax
was repealed in 2006. Phone companies will stop collecting the tax as of July
31, 2006.
See IRS Publication 510, Lxcise Further Information on tax-free purchases is available from manufacturers'
Ta"~'~' representatives or from the IRS. A special IRS publication discusses excise
taxes.
b. Federal fuel taxes
z~ t1.s.c.A.. § Fal~(b)(2>cc). Cities are exempt from the federal excise taxes on gasoline and most diesel fuel
26 U.S.C.A. y ~l031(a)(2) un~erak<d purchased for the exclusive use of thecity. The federal excise tax on gasoline is
by Affordable Gas Price Act, x.R. currently 18.3 cents per gallon. The federal excise tax on diesel fuel and.
anna, > o9tb tong. (zooo>. kerosene is currently 24.3 cents per gallon. The 2006 Congress amended federal
tax law, suspending the federal fuel tax if the cost of retail gasoline exceeds the
benchmark retail price of $3. However, this is not likely to affect cities, already
broadly exempt from the federal fuel tax.
a6
League of Minnesota Cities
-55-
see txs Pnbucation slo, Exoise Different tax rates exist for some special fuels such as ethanol and aviation
Taxes. fuels. Contact the IRS for further information about these rates. Dyed diesel fuel
and dyed kerosene sold for nontaxable uses is not subject to federal excise tax,
but is subject to state excise taxes.
Exempt gasoline purchases
See IRS Publication 378, Fuel Tax There are two ways a city can use the federal tax exemption for gasoline
Credits and Refunds. llrchaseS; the ci can: 1 urchase the asoline without a m the tax b
P n' ()p g p Y~ g Y
filing a certificate with the. vendor; or (2) apply for a refund using IRS Form
8849.
See Appendix F, Forms 1 ana 2. First, a city can purchase the gasoline without paying the tax by filing a
"Certificate of Ultimate Purchaser" with the vendor. The form certifies that the
gasoline is for the exclusive use of the city. If the city buys its fuel directly from
a wholesaler, it should file the form with the wholesaler. If the city buys its fuel
from a retailer, it should. file the form with the retailer. The retailer must then
provide a "Certificate of Ultimate Vendor" to their supplier.
26 us.c.~+. ~ bazl. The second way for a city to use the tax exemption i to pay the tax at the time
ze us.c.A. ~ vaz7p). of purchase and apply for a refund on IRS Form 8849 at alater date. Generally,
this approach is used by cities unable to locate a vendor that will sell gasoline
without charging tax. Applications for refunds may be made at the end of the
year, but may be made quarterly if the gasoline taxes during the quarter are
$750 or more.
ii. Exempt diesel fuel purchases
There are also two ways a city can purchase diesel fuel without paying federal
excise tax; the city can: (I) purchase dyed diesel fuel; or (2) purchase undyed
diesel fuel tax-free from a registered ultimate vendor.
z~ U.s.c.A. § 4os2(a). First, cities may purchase dyed diesel fuel without paying federal excise tax.
Dyed fuel is dyed red to mark it as fuel sold for nontaxable uses. Cities that buy
dyed diesel fuel should be certain that a notice stating "Dyed Diesel Fuel,
Nontaxable Use Only, Penalty For Taxable Use" appears on all papers. and
receipts concerning their purchase ofthe dyed diesel fuel.
See IRS Publication 378, Fnel Tax Alternatively, cities may purchase undyed diesel fuel from a registered ultimate
Creaits and Refanaa• vendor at atax-excluded price. Only a registered ultimate vendor may apply for
a credit or refund of the federal excise tax on diesel fuels. As such, most cities
See Appendix F, Form 3. will not be able to apply for these refunds and should look for diesel fuel
vendors that sell dyed diesel fuel or are registered ultimate vendors authorized
to sell undyed fuel without the tax. A registered ultimate vendor will require the
city to submit an exemption certificate as documentation that the sale was for a
nontaxable use.
Contact the IRS Tex Exempt Further information about the tax-free purchase of gasoline and diesel fuels is
Governmems ana Entities (TE/GE>
Operating Division office of available from the Lea ue the IRS and the Government Finance Officers
g > >
Federal, State and Local Association, Federal Liaison Center (which supplied the sample forms found in
Governments at 877-829-5500. AppendlX F).
Contact GFOA at (202) 429-2750,
Guidelines for Preparing City Budgets 2007
47
-56-
c. Liquor occupational tax
zei us.c.A. § stz3~nt~3~. The federal special occupational tax is currently $250 per year. Every dealer of
distilled spirits, wine or beer, .including municipal liquor stores, must pay this
special tax and obtain a tax stamp. A city that owns and operates municipal
liquor stores does not need to pay more than one special tax, regardless of the
number of city-owned stores.
2. State taxes
a. Sales and use tax
Ivlirut. 5taz. ~ 279A.70. With few exceptions, cities pay the same 6.5 percent sales tax on most
see MN Keve,iae sates Tax Fact purchases of goods and services that is paid by individuals and businesses. The
Sheet 142, sates ro Govermm~tts. sales tax exemption for food, clothing, and medicine extends to cities.
b. Use tax
see MN Kevenue sates Tax Faor Vendors generally collect sales tax at the time of sale; however, if the vendor
Sheet ]46, taseTax enr t3us;oesaes. does not charge sales tax on taxable items, cities must pay use tax. Use tax is
similar to sales tax. Use tax applies to items bought without paying Minnesota
sales tax to the seller. For example, items purchased through mail order or over
the Internet may be subject to use tax or another tax.
n-rian. star. g zy7a._ao: When purchases are made in other states, cities should check with that state as
to whether the purchase is subject to that state's sales tax. If the purchase were
subject to the sates tax of another state, the city would be exempt from paying
the Minnesota use tax only to the extent that the sales tax rate in the other state
is equal to or greater than the rate in Minnesota. A city that pays a lower sales
tax rate in another state will need to pay the difference between the other state's
sales tax rate and the Minnesota rate as use tax.
i. Exemptions
Minn. Stat. 3 297A.70, sttbd. z. public schools, public libraries, public hospitals, and public nursing homes. are
exempt from sales and use tax.
Minn. slat. ~ 297A.7U, suhd. 2, 3. Some SpeC1f1C, limited exemptions to sales and use tax apply to certain items.
Some of the more common city purchases not subject to sales and use tax
include: bulletproof vests; repair and replacement parts for emergency rescue
See MN Kevenue Sales Tax Fact vehicles includin fire trucks and ambulances but not oliee ears• certain solid
Sheet 13.5, Fire Fighting ? g p '
syaipment. waste disposal machinery and equipment; and certain firefighter personal
protective equipment.
Capital equipment
Minn. srar. § 2S)7A.68. The purchase or lease of capital equipment is exempt from sales tax and eligible
See MN Kevenue Sales Tax Facl for refund claims. "Capital equipment" means machinery and equipment used
sheet to3, capital Equipment. primarily from manufacturing, mining or refining tangible personal property to
be sold ultimately at retail. Few city purchases will fit this exemption, but
certain purchases made by city water or electrical utilities may qualify. For
refund eligibility, check with the Department of Revenue.
48
League of Minnesota Cities
-57-
Motor vehicle sales tax
Minn. Star. § 2478.02. The state motor vehicle sales tax of 6.5 percent applies to all city purchases of
Minn. Stut. § iG8.012, snhd. t(h). vehicles except specific emergency vehicles that are not required to be
registered, In general, fire vehicles, ambulances, and police patrols are not
Minn. Scat. ¢ 297B.U3 (s). taxable since their registration is not required. Bookmobiles or library delivery
See MN Revenue Sales Tax: Fact vehicles are also exempt.
Sheet 125, Molor Vehicles.
Payments on vehicles leased by cities are treated as individual transactions
subject to the general Minnesota state sales tax rather than to the motor vehicle
sales tax. Lease payments on motor vehicles leased by cities are exempt from
Mann. Stet. g 297A,70, sabd. general sales tax if the vehicle is exempt from registration. Vehicles acquired
3(a)(7).
using a lease agreement that includes a buyout option may be considered a sale
subject to the motor vehicles sales tax.
3. State fuel tax
Minn. Stat. § 296A.07, subd. s. Cities are generally subject to state gasoline and special fuel petroleum taxes.
Minn. Star. ~ 29(A.08, tined. ?. The state gasoline tax is 20 cents per gallon. Ethanol blends of gasoline are
taxed at lower rates. (An ambulance service, licensed under state law, and some
public transit systems or transit providers are exempt from the state gasoline
tax.) Other special fuels such as diesel and kerosene fuels are also subject to
state petroleum tax.
Minn, star. ~ 24t;A.os, suhd. t (~>. Although dyed diesel fuel is not subject to federal excise tax, it is generally
subject to state tax. (Dyed fuel is dyed red to mark it as fuel sold for uses not
subject to federal fuel tax.) Undyed diesel fuel is likewise subject to state tax
even though cities may be eligible for a federal refund of the federal tax charged
on undyed diesel fuel.
.Minn. star. § z46~.t~: Cities may be eligible for a refund of state petroleum taxes paid for fuel used for
see MN Revenue sates Tax Fact off-highway business purposes. The refund does not apply to fuel used in
sheet u~, Peaotenn, Proaacts. licensed motor vehicles, Nor does it apply to fuel used in motorboats, all-terrain
vehicles, and most snowmobiles.
See MN Revenue Petroleum Fact To claim a refund of state petroleum tax paid for fuel used for off-highway
sheet 300. business purposes, a city must submit detailed supporting information to the
see MN Revenae Form PDR-1. Department of Revenue using Form PDR-1. Minnesota general sales tax must
be paid on any refunded gallons.
baimt. star. ~ ie8.ot2, snbd. t(b}. Diesel fuel used by some city fire vehicles, ambulances, and police patrols for
Minn. Stat. § 24GA.U1, subd. z9. which registration is not required is exempt from the state special fuel tax and
from the general sales tax. For more information about diesel fuel refunds,
Minn. star. ~ z9hA.o8. contact the Petroleum Tax Division of the Department of Revenue, at (651)
Minn. Star. § 297A.68, subd. 19(6). 296-0889.
4. State deed tax
Minn, star.; zx7,zt. Cities are subject to the state deed tax for conveyance of land by deed. The tax
must be paid before the county will record a property transfer. The tax is $1.65
if the price of the property is $500 or less. If the price is more than $500, the tax
rate is .005 of the net consideration.
Guidelines for Preparing. City Budgets 2007 49
-58-
5. Solid waste management tax
Minn. stat. 04 z9~x.oz•.o3. Waste management service providers are responsible for collecting and
remitting the solid waste management tax of 9.75 percent. for residential
generators and 17 percent for commercial generators. Cities are responsible for
See A4N Revenue Special Tnxes the tax if they: (1) provide solid waste management services; (2) directly bill on
Fact Slteet I, Solid Waste
ManagementTaz. a property tax statement for private waste management services; or (3) subsidize
the cost of waste management services through the sale of bags, stickers or
other indicia.
50
League of Minnesota Cities
-59-
Guidelines for Preparing City Budgets 2007
-60-
51
~.
Figure 2
City Revenues -1999 and 2004
Revenue Source 1999
Revenues Percent
of Total. 2004
Revenues .Percent
of Total Revenue Source 2004
Rev. in
millions
Property Taxes 801,604,920 23.65% 1,163,880,706 29.07% Property Taxes 1,164
Tax Increments 267,109,725 7.88% 248,110,337 6.20% Tax Increments 248
Other Taxes 163,191,989 4.81 % 203,823,842 5.09% Other Taxes 204
State Grants 863,276,516 25.47% 848,133,132 21.18% State Grants 848
Special Assessments 237,484,663 7.01 °10 286,890,417 7.16% Special Assessments 287
Charges for Service 279,795,068 8.25% 406,842,459 10.16% Charges for Service 407
Interest Earnings 129,649,860 3.82% 89,771,533 2.24% Interest Earnings 90
Federal Grants 155,138,09 4.58% 185,882,619 4.64% Federal Grants 186
Licenses and Permits 116,075,469 3.42% 165,408,805 4.13% Licenses and Permits 165
County and Local
Grants 53,532,382 1.58% 100,393,504 .2.51% County and Local
Grants 100
Fines and Forfeits 33,608,095 0.99% 41,848,613 1.05% Fines and Forfeits 42
Other Revenues 289,572,300 8.54% 263,238,536 6.57% Other Revenues 263
Total 3,390,039,078 100.00% 4,004,224,03 100.00% Revenues from
Borrowin 992
Other Financing
Sources Other Financing
Sources 37
Revenues from
Borrowin 810,554,640 991,732,735 Transfers from
Ente rise Funds 154
Other Financing
Sources 11,666,038 36,608,977 Transfers from
Govemmental Funds 697
Transfers from
Enter rise Funds 116,062,209 154,375,201
Transfers from
Governmental Funds 676,046,874 697,314,048
1400
c 1200
0
__ 1000
~ 800
c
'y 600
L
~ 400
p 200
0
Figure 2a
City Revenues for 2004
1,164
l
186 165
ey ~
o ey ~y
° ry oei Oy cry by cwy ewy Jes
'
,~a~' Le ,~a~' Gra ~~
ec ~~ G~x e~6
mo
G~ o~
~~
G`e er
~e c
s
yS
`
~ I
\
a~
~
ae
~e
Qe
\c O~r
yy~
5~ a
yo
ey~ ~
~c
e`
ac
~`
Q`o
~~~ . \P
a Qe
cAm
wer
c a~
ey
~y
`r
o 0
°
\
~' ra ~
G cy a
~~
~
~
Q2 cr
vrG
~ ~
cA
52
League of Minnesota Cities
-61-
IV. Revenues
Cities in Minnesota receive revenue from a variety of sources. Property taxes,
general and categorical state aid, and fees comprise the largest sources of
revenue for most Minnesota cities.
Minnesota law greatly restricts the available types of local revenue sources. For
example, unlike some other states, local governments in Minnesota may not
impose an income tax. Also, without specific legislative authority, cities may
not impose a local sales tax, and those that have been granted are usually for
specially designated purposes.
As a general rule, if the state does not specifically authorize cities to use a
revenue source (such as special authority for local sales taxes), the city cannot
use that source.
see Figures i ana za• Figures 2 and 2a show distribution of revenue sources for all Minnesota cities in
the calendar year 1999 and 2004.
A. Tax revenue
Tax revenue includes current property taxes; delinquent property taxes;
apportionments from tax forfeit sales; franchise and public utility taxes; and city
sales, gambling, and lodging taxes:
B. Property taxes
Minn. lint. § z73.i3. The property tax is the primary revenue source for most Minnesota cities. The
property tax applies to all taxable property within the jurisdiction's boundaries.
1. Class rate
Depending on use, properties have different class rates that determine the
properties' relative share of the property tax burden as well as a property's tax
capacity. For taxes payable in 2004, the following table summarizes several of
the major classes of property:
Property classification Class rate
First $500,000 of residential homestead
and single-unit residential 1.0 percent
Amount over $500,000 1.25 percent
First $150,000 of commercial/industrial 1.5 percent
Amount over $150,000 2.0 percent
Two or more units of rental residential 1.25 percent
Guidelines for Preparing City Budgets 2007
53
-62-
2. Tax capacity
Tax capacity is the measure ofproperty tax base value. Each taxable parcel has
an individual tax capacity. The tax capacity of a property is determined by
multiplying its class rate by the property's assessed market value. For exarnple,
the tax capacity of a $150,000 owner-occupied home would be: $150,000 x 1
percent = $1,500.
Each jurisdiction has a total tax capacity that is the sum of the tax capacities of
all the parcels in the jurisdiction. This total property tax base, based on the sum
of tax capacities; is used to compute the local. property tax.
The total tax base figure must be reduced by 10 percent of the powerline value
in the community, the captured tax increment value, and the fiscal disparities
contribution value, if any, to arrive at the tax base for computing the local tax
rate.
1l C. Setting the property tax levy
Each year, cities certify a property tax levy for the following year in dollars, not
at a specific rate. To compute the city tax rate, the city's certified levy is divided
by the city's total tax capacity..
The property tax levy should be set at a level to raise adequate revenue for the
operating budget when combined with other expected revenues. The final level
of expected revenue should be sufficient to result in a proiected vear-ems
balance to cover possible emergencies or contingencies.
Minn. scar. § z~s.~2. Cities with populations greater than 2,500 and those receiving taconite aid must
file an annual report with the commissioner of Revenue. The report will require
separate information on levies for debts, libraries, and general levies. The
annual deadline to submit the report is by Dec. 30. It the report is not filed by
Jan. 30, a 5 percent LGA penalty will be imposed.
1. Levy limits
The 2006 Legislature djd not re-imnnse levy limi s during the 2006 regular
Minn. star. ~ ?~s.n. session. Therefore, cities are not subject to state-imposed. levy limits as they
budget and levy for 2007.
a. Speciallevies
When levy limits are in effect, the Legislature exempts some levies from the
Minn. Star. ~ 2~s.~o, subd. s. overall levy limit. These exempt levies are called "special levies" and they
include:
• .Debt levies for principal and interest on all. bonded indebtedness or for most
certificates of indebtedness.
• Voter-approved levies assessed against market value.
• Armory construction levies.
54
League of Minnesota Cilia
-63-
• Levies for matching requirements for state and federal grants, to the extent
that the matching requirements exceed the previous year matching
requirements.
• Levies for certain expenses related to natural disasters.
• Levies to pay abatements under Minn. Stat, § 469.1815.
• Levies to pay increases in the employer contribution rate to the PERA
coordinated plan that are effective after June 30, 2001.
• Levies to pay for operation of a lake improvement district.
• Levies to repay a state or federal loan used to fund required spending for a
state or federal transportation project or other state or federal capital
project.
• Levies to fund a required contribution for a police fire relief association, to
the extent that the lery exceeds the amount levied in 2001.
Minn. Stat. 4 275.74, sand. ~. Because levy limits are not in effect for 2007, the Department of Revenue will
not require cities to file a form to claim special levies. However, as noted above,
cities with a population greater than 2,500 and those cities receiving taconite aid
Mann. st~~tt. § 27s.h2. must file an annual report to the Department of Revenue. The annual report
includes the amounts levied for each of the various special levy purposes.
b. Home rule charter levy limits
Generally, home rule charter cities with levy limits will have to observe the
stricter of either astate-imposed levy limit or the local charter limit. Any charter
levy limits would generally apply,. despite the absence of astate-imposed levy
limit. It remains the responsibility of city officials to enforce home rule charter
levy limits.
2. Election to exceed levy limits
ivfinn. star. ~ 27s ~s. If lery limits were in effect, a city could exceed its levy limit by an amount
approved by the majority of voters on the question at a general or special
election. A levy override so authorized by the voters must be levied against net
tax capacity unless the levy required voter approval under another general or
special law or any charter provision.
3. Referendum levy elections for certain debt
A11 city levies for which voter approval is required, except levies approved by
voters to exceed levy limits, must be applied on the basis of referendum market
value rather than tax capacity. A common example of this type of levy is debt
service levies for the repayment of general obligation bonds.
Guidelines for Preparing City Budgets 2007
55
-64-
Several types of general obligation bonds, however, are excepted from
Minn. Scat. ~}' 4?5.58 as amended referendum requirements. For example, cities are able to issue bonds for some
try 2000 Minn. Laws ch. 259, art, street reconstruction projects without regard to the traditional election
to, Sec.. t t. requirements. Also, cities have authority to issue bonds without an election for
Minn. stat. ~ azs.s2t. some tax increment bonds and certain capital improvements used as a city hall,
public safety or public works facility.
Levies applied on the basis of referendum market value fall more heavily on
homestead property than levies applied on the basis of tax capacity. This is
because agricultural and seasonal recreational residential property is exempt
from the referendum market value definition, so the burden of a referendum
levy falls exclusively on remaining classes of property, including homestead,
apartment, and commercial industrial property.
Cities must specifically advertise this referendum market value requirement as
part of the referendum levy notice.
4. Property tax delinquencies
Sometimes property tax payers do not pay their property taxes, which will
reduce the city's property tax receipts for that year. When the delinquent
property taxes are eventually collected, .penalties and interest will be applied.
Minn. scat. g zz~.tst. Half the interest on tax delinquencies outstanding for more than one year is split
between the city and county in proportion to their tax levy, with the other half
going to the schools. All penalties on tax delinquencies are equally divided
between counties and schools only.
5. Property tax relief programs
The state provides direct property tax relief to property taxpayers in certain
situations. These programs do not provide the city with any additional revenue,
but they are based on the overall level of taxation in each community.
Knowledge of these programs maybe useful for the budgeting and truth-in-
taxation process.
a. Targeting
Minn. Stat. p 29t7A.04, subd. z. Homeowners whose property taxes have increased by more than 12 percent and
by more than $100 are eligible for astate-paid reimbursement, or special refund,
of the tax increase. The homeowner's property tax shall be automatically
reduced by a special refund equal to 60 percent of the amount of the increase
over the greater of 12 percent of the prior year's property taxes payable or $100.
In addition, owners of non-commercial cabin property whose property taxes
have increased by more than 10 percent and by more than $100 are eligible for a
credit equal to 75 percent of the first $300 of the increase.
b. Homeowners' refund
Minn. Star. $ 290A.04, sand. z. Homeowners who pay property taxes in excess of a percentage of their income
are eligible for astate-paid credit. The maximum credit is currently $1,500. The
credit declines as income rises and is phased-out for incomes over $77,520.
Eligible homeowners must complete and submit Form M-1PR to the state.
56
League of Minnesota Cities
-65-
c. Renters' circuit breaker
Minn. Siar. ~ 290AA4, snbd.2a. Renters who pay properly taxes. (through their rent) in excess of a percentage of
their income are eligible for astate-paid credit. The credit declines as income
rises and is phased-out for incomes over $41,820. Eligible renters must
complete and submit Form M-1PR to the state.
6. Local sales tax
Sec MN Reveituc Sales 7'ax Fact A growing number of cities have received specific legislative authority to
Sheet 164, i.ocal Sales and Use
T~~. impose a local sales tax for purchases made in or received within the city. For a
list of local sales taxes, and a history and description of local taxes, see
Minnesota Revenue Sales Tax Fact Sheet 164.Only Duluth has a sales tax for
general use. Afl other local city sales taxes are dedicated for specific purposes
and projects within the city.
Minn. Slnr. ~ 297A99, snbd. z. In order to impose a local sales tax, a city must obtain special legislation -and
approval from local voters at the ballot box. City. councils wanting special
legislation for local sales tax must also pass a resolution before requesting
legislative approval of such a tax. The resolution must include information on
the proposed tax rate and how the tax revenue will be used, the total revenues to
be raised before the tax expires, and the estimated length of time the tax will be
in effect.
Minn. Stat. ~ 297A.99, snbas. s-~. Minnesota iaw provides for uniformity in the collection and administration of
local sales taxes. The local rates apply to all taxable sales; complementary use
tax applies with all local sales taxes; and all state exemptions from state sales
tax also apply to local salestaxes. Cities cannot collect local sales tax from
another political subdivision.
Minn. Stet. ~ 297A.99, saba. 9. The collection and administration of local sales tax is performed by the
ivtinn. Stay. ~ 297A.99, subd. l 1. Department of Revenue. The department remits the collected local sales tax to
the city on a quarterly basis. The remittance is reduced by the amount it costs
Report on Minnesota's Local Sales the de artment to collect and administer the tax.
and Use Taxes. p
D. Local lodging taxes
Minn. srar. ~ a69.190. A city may pass an ordinance to impose up to a 3 percent tax on the gross
receipts of lodging at a hotel, motel, rooming house, tourist court, resort or city
campground. The law requires that 95 percent of the gross proceeds from the
tax be used to fund a local convention or tourism bureau for the purpose of
marketing and promoting the city. Separate rules govern lodging taxes adopted
before 1972.
E. Gambling tax and fund
Minn. Stnt. ~ 349.213, anba. 3. Cities may impose up to a 3 percent local gambling tax on licensed gambling
organizations in order to cover the cost of regulating lawful gambling. A city
may not use these tax revenues for any other purpose.
Guidelines for Preparing City Budgets 2007
s7
-66-
Minn. Stal. ~ 349.2]3, snnti. tia~. Cities may also require organizations conducting lawful gambling to contribute
0 percent of their net profits derived from lawful gambling to a city-
administered fund to be disbursed for lawful purposes. Such funds cannot be
used for the benefit of a pension or retirement fund.
see LMC «sr:von ,ne,,,o zss.7, For further discussion of lawful gambling expenditures and regulation, see
c~„~>;,r c;~mn~,„~, LMC research memo 255.7, Lawful Gambling.
F. General state aid
Cities in Minnesota receive a variety of shared revenues from the state. Each of
these programs has a separate policy goal, and, taken in combination, the
programs and their impact on city finances can be confusing. The following
sections describe these programs and their interaction with the city budget-
setting process.
1. Local government aid
Local government aid (LGA) is intended to reduce disparities between cities in
both revenue needs and taxable wealth by equalizing cities' ability to provide
average-level services at reasonable property tax rates.
a. Background
LGA was originally established in 1971 as a per capita revenue sharing/property
'-' tax relief program that initially replaced the exempt property reimbursement
program and the sales tax per capita aids. In 1973, the LGA program was
expanded as cities lost other miscellaneous revenues.
Since the LGA program was created, the formula has been amended or changed
frequently, In 1993, the Legislature enacted a new formula based on relative
city "need" and tax base. That formula distributed aid for amounts above a
grandfathered base of the LGA received in 1993. The old program would have
distributed about $608 million to cities in 2004.
b. New LGA program
Minn. Slat. §§ 477A.O11, A13 • The 2003 Legislature enacted a new LGA program that distributes $437 million
per year. The new program eliminates the 1993 grandfather aid base, although it
maintains about $26 million in aid base for 42 cities that. reflect increases in
their total base since 1993. The new program does not provide for an automatic
inflationary increase.
btinn, star. Q a77:a.oti. The new program includes a new formula for cites over 2,500 population and an
update of the existing formula for small cities. The new formula for cities over
2,500 population uses a number of statistical variables to measure each city's
expenditure need. The new need formula variables include: (1) pre-1940
housing percentage; (2) population decline over the past 10 years; (3) accidents
per capita; (4) average household size; (5) metro or non-metro; and (6) adjusted
net tax capacity. Small cities of 2,500 population or less remain subject to the
old need formula variables, which are: (1) pre-1940 housing percentage; (2)
population decline 1990-2000; (3) commercial/industrial market value
percentage; and (4) population.
58
League of Minnesota Citiea
-67-
For all cities, revenue need is compared to ability to pay or revenue-.raising
capacity. Taconite aid is phased in to the ability-to-pay calculation. Cities that
have revenue needs that exceed their local ability to pay receive a share of the
LGA distribution.
c. Transition to new formula distribution
Although the new formula is used to compute the initial aid for 2004 and
beyond, the 2003 Legislature enacted several transition mechanisms to buffer
the impact of the transition to the new formula for individual cities.
Minn. Stat. ~ 477A.Ot3, Saba. 9. For 2005 and beyond, cities with populations over 2,500 may not receive aid
reduction under the new formula from one year to the next greater than 10
percent of the previous year's levy. This provides up to a five-year phase-in of
the new formula amounts for larger cities that receive greatly reduced aid
amounts under the new formula. Cities with populations less than 2,500 may not
receive aid reduction more than 5 percent of their 2003 certified aid amount.
Also, the change in total aid for any city shall not be greater than the previous
year's levy by more than 10 percent.. And, even if a city has a charter provision
or ordinance that says otherwise, the Legislature gives a city whose certified aid
goes down from the previous year's level the authority to lery for that decrease
and make up the difference from one year to the next.
d. Taconite aid phase-in
Minn. Star. ~ 477.A.013, Cuba. s. For taconite cities, the new aid formula phases in the taconite aid distribution to
each recipient city's "capacity" measure. The effect of the inclusion of taconite
aids is to reduce the LGA distribution to these cities-in some cases
dramatically. 'The taconite aids are phased in 25 percent increments over four
years beginning with the 2005 aid distribution. The phase-ins for small cities
and large cities described above would further mitigate the inclusion of the
taconite aid phase-in. For example, the full effect of the taconite phase-in might
not occur for some smaller cities for as long as 20 years.
The 2006 tax bill establishes a special fund and creates cone-time 2007
2006 Minor. Laws ch. 259, art. 12, distribution of 38.4 cents per ton of the taconite production tax that would
s°a.13 amendtngMinn. siat. 9 otherwise be distributed into the property tax relief account. The property tax
29g 296 t.
relief account currently has sufficient resources to cover the ongoing taconite
homestead credit without this one-time distribution. Revenue in the special. fund
is allocated to a variety of infrastructure projects in the taconite tax relief area.
2. LGA Payments
Minn. star. § a77A.o1 s. LGA payments are made to local units of government in two equal installments
on or around July 20 and Dec. 26 each year. A city may request that all or part
of its Dec. 26 payment be made at anytime after Aug. 15 if the distribution is
necessary to meet the city's cash flow needs. These requests should be directed
to the commissioner of Revenue.
Guidelines for Preparing City Budgets 2007
59
-68-
a. Notification and certification
Minn. stat. ?; a77n:u1a. The commissioner of the Department of Revenue will notify each city of its
2007 LGA distribution during the first week of August, 2006. This notification
includes the data and factors used to compute the LGA distribution. Cities. have
60 days to appeal the calculation or factors used in the computation. City
officials should use the official state LGA notification in the budget-setting
process.
b. Status of city for aid calculations
2006 ivtinn. Laws ob 2s9, ;~. s, In regard to annexation and consolidation, a city's population status on June 30
seg. a, amending Mann. Stet:. d is used as the basis for the calculation and distribution of aid the subse uent
477A.014, s<ibd. 1, q
year. However, the Department of Revenue must now have extensive
information about annexations (boundary adjustments), or changes in form of
government, by July 15 to calculate local government aid adjustments for taxes
payable the following year.
G. Market value homestead credit
blink. srat. d 27s.lssa: The MVHC program replaced homestead and agricultural credit aid, which was
repealed in 2002. Beginning with taxes payable in 2002, homesteads became
eligible for state paid credit of as much as 0.4 percent of a home's market value.
Homeowners do not apply for this credit-it's automatically applied and the
state reimburses local governments for the value of the credit.
The maximum. credit is $304 per home. A home with a value. of $76,000
receives the maximum credit. The credit is reduced by $9 per $10,000 of value
in excess of $76,000-so, homes that are valued. at $414,000 or more do not
qualify for any credit.
The full amount of MVHC does not go to cities. Rather, it is proportionately
distributed among the various taxing districts in which the home is located.
60
Cities do not have to budget for MVHC. The credit will simply replace a
portion of the property taxes that a homeowner would otherwise pay to the city
with state revenues. If a city prepares estimates of the impact of the city's
proposed property taxes on sample properties, however, the city may want to
include the impact of MVHC in the estimates.
Cities will receive one-half of the state reimbursement for MVHC on Oct. 31
and the remaining one-half on Dec. 26. This payment structure means that a
portion of the property tax receipts a city expects to receive with the first-half
distribution of the property taxes from the county will be effectively delayed by
more than three months. This could be an important cash flow consideration for
cities with tax bases that are predominantly comprised of lower-value homes
(homes generally under $100,000 market value).
Market value homestead credit reimbursement due to tax increment financing
districts is paid entirely on Dec. 26. This payment structure could impact the
cash flow of TIF districts that are predominantly comprised of lower-value
homes (homes generally under $100,000 market value).
League of Minnesota Cities
-69-
The 2006 Legislature ended previous. cuts in the market value homestead. credit
(MVHC) Contact the League for the .latest estimates of MVHC reimbursements
if you have questions.
Minn. Stat. eh. h73F,
Minn. Stat. ch. 276A,
H. Fiscal disparities programs
Communities in the seven-county metro area participate in the metropolitan
fiscal disparities .program. Communities in parts of northeast Minnesota
participate in a similar taconite tax relief area disparities program.
Under these programs, communities in each. area share a portion of the growth.
in commercial and industrial property value with other jurisdictions in their
area. The programs redistribute this growth to municipalities in the respective
programs through a formula based on population and market value of taxable
Property.
Designated county auditors (Anoka and St. Louis) administer the overall
application of each fiscal disparities program, and each county auditor
completes the necessary computations before the ]ocal property tax rates are
computed, It is, therefore, not essential foreach city official to understand the
intricacies of the program: Because the fiscal disparities program has a
significant bearing on local tax burdens, city officials in each area may want to
understand the program's general structure and impact.
1. Contribution
.Each city's tax base contribution to the fiscal disparities program is 40 percent
of the growth in commercial/industrial tax capacity since the base year (1971
for the metropolitan program and 1995 for the taconite area program), This
growth is notlimited to new construction. The effects of inflation and
revaluation of property are also considered in the growth calculation..
2. Distribution
Generally, each community receives. a tax base. distribution from the program
based on the relative fiscal capacity of each community. Fiscal capacity is
measured by market value per capita: Cities with relatively less fiscal capacity
receive a larger distribution from the program.
3. Impact on levies
City officials are notxequired to make any adjustments to their levies as a result
of the fiscal disparities program. The county auditor makes the adjustments.
before the local tax rates are computed.
Each city raises a portion of its levy (known. as the distribution levy) through the
fiscal disparities program. The distribution levy is determined by multiplying
the city's prior year tax rate by the distribution value. The distribution levy is
subtracted from the certified levy before the local tax rate is computed. In this
manner, a portion of each city's levy is raised from local taxpayers, and a
portion is raised from all commercial and industrial property in the fiscal
disparities area.
Guidelines for Preparing City Budgets 2007
61
-70-
4. Impact on taxpayers
Non-commercial/industrial property owners are taxed entirely at the total local
property tax rate that reflects the net impact of the fiscal disparities program on
each community. The program may cause the local-tax rate to be higher or
lower depending on whether the city contributes more tax base value to the
area-wide pool than they receive in distribution value.
Commercial and industrial properties have approximately 30 percent of their tax
capacity taxed at the area-wide tax rate. The other 70 percent of their tax
capacity is taxed at a local tax rate. The area-wide tax rate is the same
throughout the fiscal disparities area; therefore, the overall property tax burden
on commercial and industrial properties reflects less variation from community
to community than property tax burdens on other types of properties.
I. Categorical state aid
Other aid programs distribute funds to cities for specific purposes.
1. Fire and police state aid
Mi"". srar. §§ e9.o~i-.osi. Another primary source of intergovernmental revenue is state aid for police and
lainn. sort. § azan.oa. fire services. This money is apportioned as state aid to qualifying cities for fire
and police retirement and relief. If there is no firefighters' relief association,
then the fire aid must be used to maintain the fire department.
Minn. scat. § 69.o2i, sutxl. t. Funding for these programs comes from the state general fund and is based on
taxes paid to the state for certain insurance policies.
2. ,Fire state aid program
a. Qualification
Nf;no,. stat. § 69.oi ~, sui,a. a. In order to .qualify for state aid for fire service, a city must have a city fire
department that was organized prior to March 15 of the previous year, or have
contracted with an independent or nonprofit firefighting corporation that
provides relief and pension benefits to its members.
Minn. scar. § r,9.oi i. sung. 2. To qualify for fire state aid, the clerk of a city with an organized fire
Nunn. 5tnt. § 69.021., sand. a. department, or the secretary of an independent nonprofit firefighting corporation
and the secretary and treasurer of the firefighter's relief association, must jointly
certify the existence of the department or corporation that meets the
requirements for receiving state aid. The certification forms will be provided by
the commissioner of the Department of Revenue and must be sent back to the
commissioner each year by March I5.
Minp. srar. § ~9.oi i, sand. a. Qualification depends on all of the following factors:
• Meeting minimum personnel, training and equipment standards.
• Meeting annual financial reporting requirements.
• Supplying any other information required by the commissioner.
62
League of Minnesota Cities
-71-
Minn. Star. ¢ 69.011, sabd. 3. Upon completion of the determination of qualification (on or before Oct. I) the
Minn.. Stat. ¢ 69.021, snba. 4. commissioner will calculate the amount of fire and police state aid to be
received by each city. If the relief association does not meet the financial
Minn, star. ¢ 69.ust' disclosure provisions in the law, it will not qualify for the funds,
b. Loss of state fire aid
Minn. Stet. ¢ 424A.02, subd. 3a There is a penalty for paying relief association benefits in excess of the statutory
limits. This penalty includes the loss of fire state aid.
Minn. Stet. ¢ 424A.02, s<ibd. ~o. Volunteer firefighter relief associations must file a copy of revised bylaws with
the state auditor when they are amended. Failure to do so could mean a loss of
state aid until such documents have been filed.
c. Distribution
Minn. Stet. § (19.021, snbd. 7. Fire state aid distribution from the state to cities and to relief associations
affiliated with independent firefighters' nonprofit firefighting corporations is
done in the same way. Cities will receive both an initial state aid and an
additional minimum state aid. Initial state aid distributes about $18 million to
qualifying departments based on the population and market value of the area
served.
The minimum state aid distributes approximately $2 million to departments
based on the number of active firefighters who are members of the relief
association. If your relief association was created after 1992, special caps may
apply to your minimum state aid distribution. For further information, contact
the Department of Revenue Property Tax Division or the League.
Regardless of how it is calculated, fire state aid is paid to the city treasurer. If a
duly incorporated relief association exists, the treasurer must transmit the aid
within 30 days to the relief association if the association has filed a financial
report with the city treasurer and has met all other statutory provisions pertinent
to the aid apportionment.
3. Police stafie aid program
a. Qualification
To participate in the police state aid apportionment, the clerk of each city
employing one or more police officers must file a certification of police
officers. The certification forms are sent in December to all cities employing
police officers.
Minn, Stat. ¢ 69.011, snbd. 1(g). For police state aid purposes, a police officer is any person who meets all of the
following criteria:
• Primary source of income from wages is from direct employment by a city
as a law enforcement officer on a full-time basis of not less than 30 hours
per week.
• Has been employed for a minimum of six months before Dec, 31 preceding
the current year's certification on March 15.
Guidelines for Preparing City Budgets 2007
63
-72-
• Sworn to enforce local ordinances and the general criminal laws of the
state.
• Authorized to arrest with a warrant.
• Member of a local police relief association or the public employees' police
and fire fund.
• Certified or meets the requirements for certification by the Minnesota Peace
Officers Standards and Training (POST) Board.
bairua. slat. ~ e~.ozt, s„bd. ~8. police state aid calculations depend on the number of full-time police officers,
excluding part-time officers. If a city contracts with the county or another city
for police service, the city must receive a credit. applied to its contract of a
proportionate amount of the state aid the county or city receives based on the
number of full-time police officers providing service to the city.
b. Distribution
M;in,. slat. § ~q.o3 i, snba. s. The city treasurer will disburse police state aid as follows. If the city has a
police relief association that is not phasing out, all of the police aid must go to
the relief association. If the police retirement coverage is provided by the PERA
Police and Fire Fund, all of the police state aid must be applied toward the city's
employer contribution to the fund. If the city has a combination of both of the
above, the city has the option to:
• Distribute all of the aid to the police relief association.
• Distribute all of the aid to the employer's share of the PERA Police and
Fire Fund.
• Distribute between both, with the city's employer contribution to the PERA
fund based on the number offull-time police officers employed who are
members of the fund.
Some cities that had full-time fire departments prior to 1997 receive an
additional fixed amount of police state aid. No new excess police aid is sent to
any city for fire pension costs..
Except for cities with local police or paid fire relief associations; fire and police
state aid distributions should not exceed the amount of the city's obligation to
the PERA Police and Fire Fund.
Mann. Stat• O 69.01 I, sea. z. March 14 is the last day for filing applications for state aid, fire equipment
certificates, and the certification of police officers, as well as for filing the
financial reports. of fire and police relief associations. Audit reports and
actuarial survey reports should be filed within 30 days of being received by the
relief association,
64
Questions about the apportionment of funds to the city, the filing of contracts,
fire service area apportionment agreements, or qualifying for fire or police state
aid or funding requirements should be directed to the Department of Revenue
Property Tax Division at (651) 296-5141.
League of Minnesota Cites
-73-
4. Peace office training reimbursemenf
M;na. slat. § 3s7.o2t, 5uhds. v. 7. Funds are available annually to help defray the costs incurred by local units of
2006 Mimi, Laws clt. 282 government to provide training to peace officers. The 2006 Legislature
appropriated an additional $200,000 to reimburse local governments for peace
Minn. R. 6700.1800, suvps. a, s. officer training costs in fiscal year 2007. The training costs must have been
incurred after June 30,2006 and before July 1,2007 to be eligible for
reimbursement. In late June, the Peace Officer Standard and Training (POST)
Board will mail reimbursement application forms to law enforcement agencies.
The forms must be completed and returned to the POST Board by Aug. 1 .
Contact the POST Board for further The reimbursement amount available per officer depends on the number of
information at (6s1~ 6a3-3o60. eligible officers and is not determined until all of the applications have been
received. Large changes in the total number of police officers in the state could
affect the total. amount available. The final amounts will be determined and
checks should be mailed to cities by mid-September.
J. Amortization aid
Minn. scat. § ~23a.o2, All local police and salaried firefighters' relief associations and consolidation
accounts must amortize their actuarial deficits by Dec. 31, 2010. Three
amortization state aid programs. assist cities with relief associations and cities
whose consolidation accounts have merged with the PEItA Police and Fire fund
to meet their amortization requirement. Portions of this aid also fund actuarial
deficits in the first class city teacher funds and volunteer fire state aid.
K. Loss of amortization aid entitlement
Minn. Scat. § 423A.02, snbd. 2. When local police and salaried-firefighter relief associations become fully
funded, they lose entitlement to these aid distributions. Generally, once a city
runs out of these funding programs, it cannot become eligible again and loses
these funds permanently except under limited circumstances.
L. Street and highway funding
The Minnesota Constitution requires that state gasoline taxes and motor vehicle
registration fees provide funding for certain city, county, and state roads, These
revenues are distributed through the highway user distribution fund. This fund is
distributed by the Department. of Transportation for state trunk highways and
for certain county and city roads through the county state aid highway (CSAI-~
and municipal state aid (MSA) programs. Twenty-nine percent of the fund is
dedicated for certain county roads and highways. Nine percent goes to cities
with populations over 5,000. The remaining 62 percent is dedicated to the state
trunk highway system.
Guidelines for Preparing City Budgets 2007
65
-74-
Cities with o ulations of 5 000 or more
1. p p ,
Minn. $lal. of 162.09, sntxi. a. The MSA prog_raln currently provides direct funding to approximately 130 cities
with populations of 5,000 or more. Generally, population results from the latest
U.S. Census are used to determine a city's eligibility for MSA. For those cities
that are created by the consolidation of two or more cities, the most recent
population estimate of the Metropolitan Council or state demographer will be
used to determine the city's population until the next U.S. Census. In addition,
if the annual population estimate prepared by the Metropolitan Council or state
demographer indicates that a city's population exceeds 5,000, the city can
request a distribution based upon this estimate.
2002 Minn. Laws ch. 36d, ~ 29. An exception is made for cities between 4,900 and 5,000 in population. A city
that has previously been classified as having a population of 5,000 or more for
the purposes of the state aid system, and that has a population greater than 4,900
but less than 5,000 according to the federal Census, is deemed to have a
population of 5,000 for the purposes of the. state aid system. An example of a
city that would qualify under this law is the city of Chisholm.
irfinn. star. g 1.62.tt. As a group, participating cities receive 9 percent of the highway user
distribution fund. This money is apportioned to these cities on the basis of two
factors:
Minn. srac. q 16z.1~: . 50 percent is distributed on the basis of population in relation to the total
population of alt of the other cities receiving this aid.
• 50 percent is distributed on the basis of fiscal need. Specifically, the
distribution considers the city's adjusted money needs in relation to the
total needs of all the other cities receiving this aid. This is determined by
the estimated costs of construction and maintenance on the city's municipal
state aid streets over 25 years, annually identifying portions that need work,
and allotting appropriate amounts needed to carry out the work.
Minn. Stat. ~ 162.18, subd. t Any city with a population of 5,000 or more may issue and sell obligations, or
nmaroded by 2006 Minn. Lnws ch. bonds, for the u ose of establishin , locatin relocatin constructin
zs9, arc. <~, sec. 3 p rP g g~ g~ g~
reconstructing, and improving municipal state-aid. streets. The bonds, issued in
anticipation of MSA payments, may be issued in amounts not to exceed 90
percent of the amount of the last annual allotment preceding the bond issue the
city received from the construction account in the municipal state-aid street
fund.
n4i„n. scar. ~ 16z.o9, 5ubd.1. The funds may only be spent on 20 percent of total miles of city streets and
county highways within the jurisdiction, plus the additional miles of county and
state roads turned back to the city.
Minn. R. 8820:1400, snbp. a. Cities must designate a minimum of either 25 percent of their total MSA
distribution or $1,000 per kilometer of improved MSA streets towards general
maintenance ofMSA-designated streets. If cities wish to receive more than the
minimum, they may request that up to 35 percent of the total distribution be
used for genera] maintenance. The request for the maintenance distribution is
due by Dec. 13 for funding for the next calendar year. For further information
on the MSA program, contact: Office of State Aid, Department of
Transportation, State Transportation Building, St. Paul, MN 55155. Telephone:
(651) 296-1.662.
66
League of Minnesota Cities
-75-
2. Cities with populations less than 5,000
Smaller cities are not eligible for the direct state aid program. They do,
however, have access to state funding for certain county and state roads that
pass through their- communities. Counties, like cities, are constitutionally
guaranteed a portion of the highway user distribution fund. Twenty-nine percent
of the fund is dedicated for certain county roads and highways.
Minn. sa+t. ~ 16x.os. State law requires a portion of this aid to counties to be set aside for use on
county state aid roads within the cities. with populations of less than 5,000. The
percentage allocated in each county for these roads depends on the estimated
costs of construction projected over the next 25 years for the county state aid
system roads that are within smaller cities. The total amount available for this
municipal account varies widely from county to county. Those dollars the
county does not spend on roads and highways in smaller cities will be spent on
other county roads in the townships or unorganized areas of the county. The
commissioner of Transportation regulates compliance of county boards.
Minn. Stat. § 1(i2.0A, subd, a. Despite the requirement to set aside a portion of county state aid for cities, the
county can divert this money for other uses. County boards can appeal to the
commissioner of Transportation for permission to use the money elsewhere in
the county (such as outside small cities on county and township roads.). These
requests can be made when the County State Aid system lying within cities
under 5,000 population is improved to required standards. The commissioner
can grant requests to use these funds on non-city roads.
The CSAH municipal account is valuable to smaller cities. Cities should
increase their efforts to use available set-aside funds. If they do not, counties are
likely to lobby to eliminate the requirement.
A4;an. a. gs2o.iaoo, subp. ]n. Smaller cities should also be aware that a minimum of 40 percent of the total
allocation to each county is dedicated for maintenance. These funds can be
available for maintenance of county roads that run through smaller cities. Some
counties compensate the public works staff of their small cities for performing
maintenance on county roads. City. staff should check with their county highway
departments to determine the amount of maintenance funds, .if any, they will
receive for 2007.
M. Highway user tax distribution fund
Minn. Stat. § 161.081, Suvd. 1. Minnesota law, pursuant to article 14, section five of the state Constitution,
requires 5 percent of the net highway user tax distribution fund (HUTDF) be set
aside for use on municipal and state roads.
The 5 percent formula is broken down as follows:
• 30.5 percent devoted to the newly established town road account.
• 16 percent devoted to the town bridge account, allowing townships to use
funds in the town bridge account to pay t 00 percent of bridge rehabilitation
and replacement costs.
Guidelines for Preparing City Budgets 2007
67
-76-
• 53.5 percent devoted to the newly created flexible highway fund, to be used
primarily to fund trunk highway turnbacks(approximately $30 million per
year). Turnbacks aze former trunk highways that the state relinquishes
control of to another level of government, for example from state control to
county responsibility. The flexible highway fund includes turnbacks of
county highways in the computation of MSA miles.
bfinn. slat. ~ 151.os1- The statue also requires the Department of Transportation to consult with the
League of Minnesota Cities and the Association of Minnesota Counties (AMC)
regarding the distribution of the HtJTDF flexible fund's turn-back moneys. City
and county officials make recommendations on how to divide the fund between
cities, counties, and the state regarding turn-backs. The commissioner of
transportation incorporates those recommendations in the department's biennial
budget requests to the governor's office and Legislature.
N. Clean Water Legacy Act
200E Minn. Laws ch. ?51 to be The 2006 Legislature passed legislation to begin cleaning up impaired state
ecaified at Minn, stet. enap. waters-and to com l with the federal Clean Water Act. The Clean Water
114D.05 - 114D.45. P y
Legacy Act provides funds to the Minnesota Public Facilities Authority (PFA)
Fublic Facilities Au[hrni'y for wastewater capital improvement projects. Through the State Revolving Fund
(SRF) the PFA provides $32,800,000 in low-interest loans to priority projects.
Also, the Wastewater Infrastructure Fund provides $23,000,000 in supplemental
assistance through matching grants with USDA-Rural Development or zero-
interest deferred loans for priority projects
' 2005 Minn. Laws ch: Z51 Sec. 15 The final clean water package also included $8.31 million in state bonding for
t~ be codified at Minn. smt. three other ro rams: the Phos horns Reduction Grants ro ram the Small
§aar,~~.o~s P g P P g
Community Wastewater Treatment grant and loan program, and the TMDL
~ubiic Facilities aut:h°tity Grants program. The time to apply for these grants was very short and closed on
July 31, 2006.
The law also creates a Small Community Wastewater program awarding loans
and, in some situations, grants to governmental units to replace failing or
inadequate individual septic systems. This grant and loan program uses the
existing Project Priority List (PPL) scores of eligible projects to determine
which projects will be funded. The Minnesota Public Facilities Authority (PFA)
administers the program and awards loans to local units of government. When
the area served by a project has a median household income below the state
average median household income, the governmental unit may receive 50
percent of the funding as a grant. Funds for small communities to develop
technical and managerial skills related to wastewater treatment are also a
component of this program. Total awards are capped at $500,000 per year, but a
project that will take multiple years to be completed could be given a multiyear
commitment. The mix of funding could include up to 50 percent grants, with the
balance being covered by state-subsidized low interest loans. Projects must have
a project proposal approved by the MPCA. The projects will be ranked for
funding priority using the current project priority list criteria.
68
League of Minnesota Cities
-77-
2006 Minn, Laws, ~;~. zsl see. is The Phosphorus Reduction Grant program provides $2.31 million and covers
to he codified at Minn. Stat. ¢ U to 75 ercent of the ca ital costs of addin hos horns treatment to a
aa~a..o7a p P P g P P
wastewater treatment facility. Funds go first to any eligible new project that
starts construction on or after July 1, 2006. The application form for the:
Pubii~ Pisoiliries Aamoriry Phosphorous Reduction Grant program should be available on the PFA web
site as of July 1, 2006. For both new and retroactive grants (discussed below),
the application form requires detailed information on construction (as-bid or
incurred}, engineering, and inspection costs. The timeline for applications for
new grants was only from July 1, 2006, to July 31, 2006.
Remaining funds for each calendar year go to retroactively cover portions of
the debt on eligible phosphorus treatment infrastructure installed between
March 28, 2000, and July 1, 2006, as long as the city properly applies to the
PFA and qualifies before June 30, 2008. (Retroactive grants will be issued in
chronological order based on the date a facility's phosphorous reduction plan
was approved by the MPCA.)
Going forward, projects that meet eligibility criteria, and obtain approval
from the MPCA before July 1, 2010, may receive 75 percent of their capital
costs. After July 1,20]0, eligible projects may receive 50 percent of their
capital costs.
O. Additional revenue sources -Licenses
and permits
There are other sources of revenue for cities, such as different types of fees for
licenses, services, and ordinance violations, among others. Cities should be
conservative when estimating these amounts as they can vary considerably from
year to year.
Cities receive revenues from businesses and occupations licensed by the city,
such as sales of food, beer, cigarettes, liquor establishments, bowling alleys,
waste disposal contractors, and heating and utilities connections. This
classification would include non-business licenses, such as those regulating
dogs, signs, bicycles,. and buildings.
Whenever a city requires a license or permit, it may set a fee for the license or
permit. In general, statutes granting authority to issue licenses do not specify
maximum fees. In a few cases, however, the statutes set maximum fees for city
licenses or prohibit fees. For instance, state law sets maximum fees for off-sale
liquor licenses.
rormore;nfonnarinn oa mun;cipai . Municipal licensing should not be viewed as a significant source of revenue.
licensing, see Ch. 13 of the Gerierall license fees must a roximate the direct and indirect costs in issuing
League's Handbook for Minnesota y~ PP
dries. the license and policing the licensed activities. License fees that significantly
exceed these costs are generally considered to be taxes that a city does not have
the authority to enact.
Guidelines for Preparing City Budgets 2007
69
-7H-
1. Development fee reporting
Minn_ Stat. § ~ a~.ess. Minnesota statute mandates an annual report to the state regarding municipal
development and construction fees and costs associated with services related to
these activities. The 2003 Legislature amended the reporting requirement by
Miun. Slat. § 16Ii.G85, as amended extendin the deadline to June 30 and exem tm cities that collect $5,000 or
by 2003 Minn. Laws ch. 6, § 1. g p g
less in fees.
2. Planning and zoning fees
n4inn. star: ~ aez.3r, snbd. a. Fees related to planning and zoning applications are required by statute to be
fair, reasonable, and proportionate. The 2004 Legislature added a statutory
requirement that fees related to planning and zoning applications have a
"nexus" to the actual cost of the service for which the fee is imposed.
3. 2006 Legislature requires municipal. action
on release of letters of credit
200(i Miun. i,aws ch. 204 The 2006 Legislature made changes to subdivision regulation. law that could
amencG'ng Minn. Stat. ¢4G2.35R, affect city budgets. Effective Aug. 1, 2006, a city or town may require that an
subd. 2a
applicant seeking subdivision approval establish an escrow account or other
financial security to reimburse the municipality for direct established costs
relating to the review, approval, and inspection of the project. In addition, this
law establishes a 30-day deadline for release and return of an applicant's
financial security when the municipality's conditions for approval are met.
Once an applicant vouches, by certified letter, that all of the city's subdivision
requirements are met, the city has 30 days to release and return to the applicant
any and all financial securities tied to the requirements-if the city does not
release the financial security within 30 days, the city must pay any accrued
interest to the applicant.
If the city determines that the conditions for approval are not met by the
applicant, the city has seven days from receipt of the certified letter to provide
written notice to the applicant indicating which specific conditions are not met.
A municipality must require a maintenance or performance bond from any
subcontractor that has not yet met all the municipality's remaining
requirements.
4. Park dedication fees
Minn. star. § a62.3ss. Regarding subdivisions and park dedication fees, the 2004 Legislature
prohibited the use of fees in lieu of dedication for ongoing operation or
maintenance, and required an "essential nexus" between a fee or dedication and
the municipal purpose to be achieved by the fee or dedication.
70
League of Minnesota Cities
-79-
5. Charges for services
Cities may also receive revenues. from election filing fees, sales of maps and
ordinances, assessment searches, court fees, police patrol and fire service fees;
street and sidewalk repair, parking fees, refuse collection, water and sewer
charges, inspection fees,. and service charges such as those made by libraries,
museums, and recreation facilities.
6. Fines and forfeits
The budget should include expected amounts from violations bureaus, courts,
confiscated deposits, and collections on bonds or surety held for enforcement or
security purposes. Cities should be careful that the expected revenues do not set
an expectation that police issue a certain number of citations.
7. Enterprise funds
These items would include expected transfers from various enterprises to
reimburse the city for administrative activities performed by city staff, office
overhead, unencumbered fund balances, etc., for departments such as municipal
liquor stores or an electric utility.
8. Franchise fees
n4inn. suv. a z~~B.36. Cities are authorized to impose a franchise fee on utility services, such as gas,
a7 us.c.A. § sae. electric, and cable television. Franchise fees for gas and electric utilities are
subject to negotiation. Cable franchise fees are limited to no more than 5
percent of the cable operator's gross revenues over a 12-month period.
xx. szs2, lov'" cong., 2d sess. However, proposed legislation currently in the U.S. Congress could
(2°06>. significantly and adversely affect Minnesota. cities' ability to impose franchise
fees on cable services (and could substantially reduce Public, Educational and
Government (PEG) funding and support). At the time this publication went to
print, it was not known whether or when this legislation will pass.
The revenues from franchise fees can be useful in offsetting a city's costs. in
regulating these businesses and maintaining and protecting the public right-of-
way. In 2000, franchise fees reflected less than 2 percent of total city revenues.
Guidelines for Preparing City Budgets 2007
71
_80_
V... T ruth -i n -taxati o n
Nunn. star. g 2~s.o~s. In 1988, the Legislature adopted a program of notice and hearing requirements
for proposed property taxes, commonly referred to astruth-in-taxation (TNT).
The TNT law requires cities to adopt a proposed budget and certify a proposed
See Ure MNUepariment of
Revenue for more information au ]e to the coun auditor on or before Se t. 15. The coup uses the ro osed
~'y ty P n' P P
-rN~r. levy to prepare parcel-specific property tax notices.
Further, the. TNT program generally requires cities hold a series of public
hearings between Nov. 29 and Dec. 20 to present the proposed levy and budget,
and to provide an opportunity for the public to comment and make
recommendations. The statute provides for the selection of hearing dates and
specifies certain public advertisement requirements.
Some cities are exempt from the TNT hearing requirement. Cities of 500
population or less are exempt from the TNT hearing process. Cities over 500
population with nominal proposed property tax increases may also be exempt
from holding TNT hearings.
Minn. Star. § 27C,p7, /All cities must adopt a final levy and budget, certifying the final levy to the
V county auditor by Dec. 27, 2006.
A. Proposed levy and budget
b4inn. SL9t. § 275,p65, smud. i~a). ~ /All cities must adopt a proposed 2007 budget and certify a proposed 2007 levy
See Appendix C for sample V to the county auditor on or before Se_ fit. 15. The proposed levy is the total of all
resolution. levies the city intends to impose, both general and special levies. (Any market
value-based referendum levies must be certified separately from the rest of the
city's proposed property tax.)
Mina. star. ~ 2~s.oes, $~t~a. 6pm> . With some limited exceptions, the TNT statute generally prohibits any
subsequent increases in the proposed levy once adopted; therefore, city officials
should. carefully consider their levy needs before certifying the proposed levy to
the county. In contrast, the proposed budget is not subject to a restriction on
subsequent increases.
B. TNT hearing exemptions
1. Cities of 500 population or less
Mi~m. srnr. ~ z~s.oes, snbd. ~ttr). Cities of S00 population or less are exempt from the TNT hearing requirements,
including selection of hearings dates and the public advertisement requirements.
Cities of 500 population or less must nonetheless: (1) adopt a proposed budget
and levy and certify the proposed levy on or before Sept. 15, 2006; (2) adopt a
final budget and levy and certify the final levy by Dec. 27, 2006. At the time the
city certifies its proposed property tax levy, it may inform the county auditor
that its proposed levy is also its final property tax levy, in which case no further
certification is necessary.
72
League of Minnesota Cities
_8~_
2. Cities with nominal tax increase
Julian: Stnf. § 275.065, snba. 6rb). A city over 500 population may be exempt from the TNT hearing requirements
if there is only a nominal increase in the total 2007 proposed tax levy from the
total 2006 final tax levy.
The exemption applies if the increase is not greater than the percentage increase
in the federal implicit price deflator (IPD) for government consumption
expenditures and gross investments for state and local governments prepared by
the Bureau of Economic Analysis of the U.S. Department of Commerce for the
12-month period ending March 31. (The IPD is a ratio of current dollar gross
domestic product (GDP) to constant dollar GDP and is used to account for the
effects of inflation.) For levy year 2006, taxes payable 2007, the percentage
increase in the IPD is 6.4187.
The Department of Revenue will provide cities over 500 population with the
information needed to make an exemption determination. The information will
include the payable 2006 final total property tax levy, as well as the maximum
proposed property tax levy the city may have for payable 2007 and still qualify
for the exemption. The levy amounts compared to determine this exemption
must be the city's total levy, both net tax capacity and market value based, as
well as debt and non-debt.
Atinn. Stet. § 275.(1G5, snt~a. G(j). The exemption is from advertising and holding TNT hearings, but not from the
requirement of selecting TNT hearing dates. For the purpose ofparcel-specific
notices, the county auditor will need to verify the city's exempt status. A city
that qualifies for the exemption may nonetheless choose to advertise and hold
.TNT hearings.
C. .Selecting hearing dates
Minn. Stat. y~ 275.065, saUd. G(a). The TNT process involves up to three hearings: two public comment hearings
(an initial hearing and a continuation hearing if necessary), and a subsequent
hearing. The public comment hearings are held to discuss the city's proposed
budget and property tax levy for the following year. The subsequent hearing is
held to adopt the city's final property tax levy.
Minn. St:u. § 275.OGS, Sued. G(b)- The public comment hearings must occur between Nov. 29 and Dec. 20. The
fie)' continuation hearing must occur at least five business days, but not more than
14 business days, after the initial hearing. All public comment hearings must be
held after 5 p.m., Monday through Friday, or anytime on Saturday. No public
comment hearings may be scheduled on Sunday.
Minn. star. p 27s.oes, snbd. Go)• The subsequent hearing must beheld on or before Dec. 27.. The subsequent
hearing must be held on a date subsequent to the date of the initial public
hearing. If a continuation hearing is held, the subsequent hearing must be held
either immediately following the continuation hearing or on a date subsequent
to the continuation hearing.
Guidelines for Preparing City Budgets 2007
73
_82_
Minn. scat. ~ z7s.o6s, sand. ~tnl. The county auditor is responsible for coordinating the selection of hearing dates
nT,'„~,. slat. ~ 27s.o65, sand. 6t >. for the initial and continuation hearings for local units of government within the
county, including cities. Cities are not required to schedule the date of the
subsequent hearing through the county auditor. Cities must certify the dates on
Minn. Slat. § 275.otiS, snbd. 6Q). which they elect to have their initial hearing and continuation hearing to the
county auditor at the same time the city certifies its proposed levy to the county
auditor (on or before Sept. 15).
N[inn. Slat. § 275.065, Saba. 6Q). Cities may not select an initial heazing date that conflicts with the initial hearing
date of another taxing authority. Cities may, however, select a date for its
continuation hearing that conflicts with the continuation hearing date of another
taxing authority if it is not possible to avoid the conflict.
A city can hold TNT public comment hearings on the night of a regularly
scheduled city council meeting as long as that date is available. If this is the
case, the city should separately convene the TNT hearing and the council
meeting. For example, the city could convene the TNT hearing and adjourn to
.conduct the regular council meeting. The subsequent hearing may be held at a
Minn. star. ~ 27s.o65, 5ni,d. 6p). regularly scheduled council meeting or at a special meeting scheduled for the
purpose of the subsequent hearing.
Minn. SutC. § 275.065, snbd. 6(i>. By Aug. 20, the county auditor shall notify city clerks of the dates on which
school districts and regional library districts have elected to hold their initial and
continuation hearings. The first and second Mondays of December are reserved
_ for the use of cities until Sept 15. In 2006, the reserved dates are Dec. 4 and
Dec. l 1.
Minn. Star. ~ 275.065, sand. 6(f). In all counties except Ramsey County, no city may select Dec. 1, 2006 (the first
Thursday in December}, for its initial hearing date since this date is set aside for
county initial hearings. Within Ramsey County,. cities may choose Dec. 1, 2006,
Mina S,at. § 275.065, sand. s. for their initial hearing, but not Dec. 12, 2006 (the second Tuesday of
December), since Dec. 12 is the date for Ramsey County, the city of St. Paul,
Minn. Slat. ~ 275.065, Saba. big>. and Independent School District No. 625 to hold their joint initial hearing. In
addition, within the metropolitan area, no city may select Dec. 6, 2006 (the first
Wednesday in December), for its initial hearing date since this date is set aside
for the metropolitan special taxing districts to hold their joint initial hearing.
Minn. Slat. § 275.065, snnd. 6(b). Joint TNT hearings with county and school officials are authorized for cities
with populations of 10,000 and over. Such cities can elect to hold a joint hearing
by adopting a resolution, and by notifying. the other taxing authorities and
requesting that.a member of the other body attend the joint hearing.
D. Parcel-specific notices
Minn. Slat. y 275.065, sand. s. Between Nov. 10 and Nov.. 24, counties will prepare and send, by first class
mail, parcel-specific notices of proposed property taxes to each property owner
listed on the current assessment rolls. These notices show the impact of the
proposed property tax levies of the city, county, school district, and special
taxing districts on individual parcels of property.
The notices include parcel-specific listings of the net taxes for TIF districts and
for the fiscal disparities levy. Specific metropolitan taxing jurisdictions' levies
aze listed separately. Levies for all other special taxing districts are aggregated
as a total "special taxing district" proposed levy amount.
74
League of Minnesota Cities
-83-
Minn. Slat. § 275.065, snba. 3(~). A city within the metropolitan area that is levying a property tax under Minn.
Stat. § 473.388, subd. 7 to pay obligations issued by the city for capital
expenditures for transit and other related activities may request that the city's
parcel specific notices show a breakdown of the city's property tax between
"regular city tax" and "transit tax," along with an explanatory statement.
The parcel-specific form uses a layout that shows the current year's taxes
payable and proposed taxes payable for the following year for each taxing
jurisdiction. The 2003 Legislature modified the parcel-specific TNT form by
tvlinn. star. § 27s:oes, subd. s. eliminating columns that report the tax change due to "spending" factors and
changes due to "other" factors.. The TNT law was also changed to except voter-
approved levies from the proposed levy amounts shown on the TNT notice.
Minn. S4~t. § 275.065, Saba. ;(e>. For each taxing authority required to hold TNT hearings, the parcel-specific
notices must clearly state the. time and place of each taxing authority's TNT
hearing, a telephone number for the tax authority that taxpayers may call if they
have questions related to the notice, and an address where comments will be
received by mail.
E. Advertising requirements
Minn. Stat. § 275.065, snbd. sa. All cities required to hold TNT hearings must advertise the initial TNT hearing.
Only the initial hearing must be advertised; the date and time of the
continuation hearing, if necessary, will be announced at the initial hearing.
Generally, the advertisement must include notice of the city's intent to adopt a
property tax levy and budget for 2007, and the time, date, and location of the
initial TNT hearing. The statute prescribes standardized advertisement forms
that cities must follow. The specific advertisement requirements vary by city
size.
1. Cities of 500 population or less
Minn. Stal. § 275.065, subd. Sa(e).
Minn. Stat. § 6a 5.12, subd. 1.
Minn. Star. § 275.065, subd. Sala).
Minn. Star. § 275.065, subd. Sa(b).
See Appendix D for sample notice.
Cities of populations of 500 or less. are exempt from the TNT hearing and
advertising requirements.
2. Cities over 500, but not more than 2,500
Cities with populations over 500, but not more than 2,500, that are required to
hold hearings must post a notice of their proposed tax levy in the three most
public places in the city. The advertisement must be posted not less than two
business days, nor more than six business days before the hearing. No published
advertisement is required for these cities. The advertisement must be in the form
specified in Minn. Stat. § 275.065, subd. Sa(b), and include notice of the city's
intent to adopt a property tax levy and budget for 2007, and the time, date, and
location of the initial TNT hearing.
Guidelines for Preparing City Budgets 2007
7s
-84-
~3. Cities over 2,500 population
Minn. Stet. § 27s.oGS, st,na. Sala), Cities with populations of more than 2,500 that are required. to hold hearings
Mtnn. stet. ~ z~s.oes, sane. sace~. must publish an advertisement at least the size of cone-eighth page standard-
size newspaper. The advertisement for these cities must be iri the form specified
See Appendix E for sample notice. In Mtnri. Stet. § 275.06$, subd. Sa(c), and include information.on the current
local tax rate, the proposed rate if no levy increase is adopted, and the tax rate
under the proposed budget in a form prescribed by statute,
Minn. Stet. ~ 295.Ob5, Saba. Sala>. The advertisement must be published throughout the city (publication in more
than one newspaper may be necessary) that includes local and/or state news and
is published at least once a week. The advertisement must not be placed in the
section of the newspaper that includes legal notices and classified
advertisements. The advertisement must be published not less than two business
days nor more than six business days before the hearing.
F. TNT hearings
The TNT law generally requires cities to hold a series of public hearings in
order to present the proposed levy and budget, and to provide an opportunity for
the public to comment and make recommendations.
Minn. Stet. § 275.oG5, ~ttna. a. The TNT process involves up to three hearings: an initial hearing, a
continuation heazing~and a subsequent hearing..The initial hearing, and the
continuation hearing if necessary, is held to discuss the city's proposed budget
"~ and proposed property tax levy for the following year. The subsequent hearing
is held to adopt the city's final property tax levy.
The separation of the public comment hearings (initial and continuation) and the
official adoption hearing (subsequent heazing) is intended to allow time for the
city council to carefully consider and possibly incorporate concerns raised by
the taxpayers. While many major decisions regarding the levy and budget may,
in fact, be quite final by the time of the initial hearing, cities should. listen to the
comments and attempt to incorporate them where feasible.
See discussion of "selecting The initial and continuation hearings are held between Nov. 29 and Dec. 20.
nearing dates" anove. The continuation hearing must occur at least five business days, but not more
than 14 business days, after the initial hearing. The subsequent hearing must be
held by Dec. 27.
1. Initial hearing
Minn. Stet. ~ 275.061, subd. The initial hearing is the first and primary public hearing held to discuss and
o(a)f l) seek public comment on the city's proposed budget and proposed property tax
Minn. star. ~ z~s.nbs, Saba. G(b). levy for the following year.
Minn. Stet. § 275.065, sttna. eld~. The initial hearing must include a discussion of the percentage increase in any
property taxes proposed by the city, if any, and the specific purposes for which
the property tax revenues are being increased. During the discussion, the
governing body must hear comments regarding a proposed increase and explain
the reasons for the proposed increase. The public must be allowed to speak and
ask questions.
76
League of Minnesota Cities
-85-
2. Continuation hearing
Minn. Stal'. § 275.065, sttba. The continuation hearing is a hearing held to complete the initial hearing, if the
6(a>(2). initial hearing is not completed on the scheduled date. If the initial hearin g is
not completed on its scheduled date, the city must announce (prior to
DRinn. Star. § 275.06.5, snbd. 6(e>. adjournment of the initial hearing) the date, time, and place for the continuation
of the hearing.
3. Subsequent hearing
Minn. Stat. § 27s.065, st,bd. The subsequent hearing is held to adopt the city's final property tax levy and the
e(axs)' final budget. The date, time, and place of the subsequent hearing may be
Minn. Slat. 9 275.065, snbd. 6it). announced at the initial public hearing or at the continuation hearing.
Minn. Stai. § 275.065, Saba. 6p>. At the subsequent hearing, the city may amend its proposed property tax levy
and must adopt a final tax levy. The city may also amend its proposed budget
and must adopt a final budget at the subsequent hearing. The final property tax
levy must be adopted prior to the final budget.
G. Certification of final levy
Minn. star. § 27s.oz After official adoption of the final levy and budget, cities must certify their final
see Append;x c for sample property tax levies to their county auditors on or before Dec. 27 (the law states,
resoincion. obscurely, that all subsequent meetings must be held "prior to five working days
after Dec. 20," which means these hearings must be held by Dec. 27.)
Minrt. Stat. ` 275.065, Subd. 6t~ri>. The final certified levy may be less than the proposed levy but it may not
exceed the amount of the proposed levy. The few exceptions to this rule are:
• Voter approved operating or capital expenditure levies: Levy increases for
operating costs or capital expenditures approved by the voters at a
referendum held after certification of the proposed levy.
• Bond referendums. Levy increases to pay principal and interest on bonds
approved by voters after certification of the proposed levy (does not apply
to bonds issued without voter approval).
• Natural disaster costs. Levy increases to cover costs incun ed due to a
natural disaster occurring after certification of the proposed levy (cities
must appeal to the commissioner of Revenue for approval).
• Tort judgment costs. Levy increases for amounts necessary to pay tort
judgments that become final after the proposed levy was certified (cites
must appeal to the commissioner of Revenue for approval).
H. Compliance and enforcement
Minn. sett. § ns.obs, s„bd. 7. State }aw authorizes the Department of Revenue to document compliance with
the TNT requirements. Cities required to hold public TNT hearings must
complete Form TNT-2007 and return it when the final levy is certified to the
county. Cities whose final .levy exceeds their proposed levy due to an allowable
exception must also complete a supplemental form.
Guidelines for Preparing City. Budgets 2007
77
-86-
1
The commissioner ofRevenue is responsible for determining whether local
governments have fully complied with the TNT laws. If a city is found to be
"substantially out of compliance," the city's property tax -evy is limited to the
amount levied in the previous year. No increase in the lery is allowed.
1. Administrative costs
No state funding is provided to administer the TNT process, so all costs
incurred must be paid by the participating local governments.
Minn. St<~t. § 275.005, sun~t. a. Counties may apportion their costs for the preparation and mailing of the
notices among all of the participating local governments. If the county decides
to apportion these costs, they must use a statutorily specified apportionment
formula.
J. TNT Summary Chart
Dates Event
On or before 8/20/05: County notifies cities over 500 of school district hearing dates.
/On or before 9/15/O5: All cities adopt a proposed budget and certify a proposed levy.
On or before 9/15/05: All cities over 500 population certify hearing dates.
11/10/OS toll/24/05: County auditor prepares and sends parcel-specific notices.
Two to six business days Cities holding. TNT hearings (cities over 500 whose proposed Levy
before initial hearing: exceeds previous years levy by more than 6.4187 percent increase in IPD}
must advertise initial hearing.
11/29/05 to 12/20/05: Cities holding TNT hearings hold initial TNT hearing.
5 to 14 business days
after initial hearing, and Cities holding TNT hearings hold continuation hearing if necessary.
no later than 12/20/05:
On or before 12/27/05: Cities holding TNT hearings hold subsequent hearing to adopt final levy
and budget.
/By 12/28105: All cities must certify their final property tax levy.
78 League of Minnesota Cities
_87_
VI. Financial reporting
There are a number of budget and financial statement reporting and publication
requirements with which cities must comply. What follows is a summary of
some of the relevant statutory requirements. Cities should consult with their city
attorneys and their accounting and auditing professionals as to the specifics of
their compliance. The fiscal year for all cities is the calendar year. This applies
to all city funds.
A. GASB reporting standards
1. GASB Statement No. 34
In June 1999, the Governmental Accounting Standards Board (GASB) issued
GASB Statement No. 34, which established new financial reporting standards
for state and local governments throughout the United States. All cities that
issue audited annual financial statements need to comply with some or al l of the
GASB 34 standards for financial reporting.l'he authoritative audit guide
suggests it would issue an adverse opinion on financial statements that are not
in compliance with GASB 34.
GASB 34 is a financial reporting framework that measures the overall net
financial condition of the city by taking into account all long-term assets and
liabilities. One of the major aspects of GASB 34 is that long-term assets should
be reported at initial cost less depreciation. GASB 34 now applies to cities of all
sizes (as of fiscal year 2004).
see GrsB Websire. The breadth and efforts that are required to implement the new standards may
be substantial, and cities should budget for associated implementation and
staffing costs..
see os,~ Web site. The new standards are lengthy and are not discussed in detail in this document.
see GFGA web site . For further information on GASB 34, contact the Governmental Accounting
Standards Board (GASB), the Minnesota Office of State Auditor, or the
Government Finance Officers Association (GFOA).
2. GASB Statement No. 43
See GASB for more information. In 2004, the Governmental Accounting Standards Board (GASB) issued
summaries oP GASS statements. Statement No. 43: Financial Reporting for Post-employment Benefit Plans
Other Than Pension Plans, and Statement No. 45: Accounting and Financial
See previous sections on GASB 43 Re ortin b Em to ers or Post Em to went Bene Tt Plans Other Than
and 45 Retiree Health Insurance p g y p y f p y
Pension Plans, establishing uniform financial reporting standards to measure
and report the long-term costs of other post-employment benefits (OPEB) plans
(e.g., retiree health benefits), as well as the funding status of these programs.
Implementation will be phased-in, with the largest employers required to
implement in financial statements for periods beginning after Dec. 15, 2005,
and the smallest employers required to implement in financial statements for
periods beginning after Dec: 15, 2007.
Guidelines for Preparing City Budgets 2007
79
_88_
B. Levy information
Mann, star. § z~s.~2. Each city over 2,500 population, and each city (regardless of population) that
see me iunv Department of receives a distribution of taconite municipal aid in the levy year must annually
R.evenne wen sue for more: submit a property tax levy report to the Department of Revenue concerning its
information. final certified property tax levy. The report is due on or before Dec. 30. If the
city fails to submit the report by Jan.30, local aid payments may be reduced by
5 percent.
G Budget information
1. Summary budget publication
Mann. stet. ~ 4~f.69es. Annually, upon adoption of the city budget, the city council must. publish a
.summary budget statement. The statement must contain information relating to
anticipated revenues and expenditures in a form prescribed by the state auditor.
see osA ~-en site for sununary The form allows for com arisons between the current ear and the bud et ear.
nuiif;et publication form: p ~' g }'
The statement must be published either: (1) in the official newspaper of the city,
or if there is none, in a qualified newspaper of general circulation in the city; or
(2} in a city newsletter or other city mailing sent to ail households in the city.
2. Summary budget ding
Minn. stet. ~ 6.~as.: Cities must also forward summary budget. information to the state auditor, using
sec osa, .,yen site for summary forms. prescribed by the state auditor. The summary data must include,
nnagec filing form; separately, any net unrealized gains or losses from investments. This summary
budget data must be provided to the state auditor no later than Jan. 31. Note that
this form is different than the form for publication.
D. .Annual financial statement
After the close of the fiscal year, cities must prepare, publish, and file financial
reports providing detailed annual financial statements. The specific
requirements differ depending upon city size. The state auditor will withhold
state aid for cities that do not submit the required information.
1. Cities under 2,500 population
Minn. star. ~ a~i.69s. In any city with a population of less than 2,500, according to the latest federal
census, the clerk or chief financial officer must prepare an annual financial
statement in accordance with Minn. Slat. § 471.698. Any city with a population
of less than 2,500, however, may choose to comply instead with the provisions
for larger cities under Minn. Slat. § 471.697, in which case the provision of
Minn. Slat. § 471.698 would not apply.
n-lion. stet: g a~t.s9s• s~i~a• ital. The city clerk must prepare a detailed statement of the financial affairs of the
sce ~s,a wee site for futanciat city in the style and form prescribed by the state auditor. The statement must
statement form pursuant to Minn. show the following:
Stet. ~ 471.698.
gp Leaguc of Minnesota Citice
_gg_
• All moneys received, sources, and respective amounts.
• All disbursements for which orders have been drawn upon the treasurer.
• The amount of outstanding and unpaid orders.
• All accounts payable.
• All indebtedness.
• Contingent liabilities.
• All accounts receivable.
• The amount of money remaining in the treasury.
• All items necessary to accurately show the revenues, expenditures, and
financial position of the city.
Minn. Slat. § 471.698, snba. i(b). The clerk must file the statement in the clerk's office for public inspection and
present it to the city council within 45 days after the close of the fiscal year.
hfinn. star. § 47t.69s, suba. l(c). The clerk must publish the statement within 90 days after the close of the fiscal
year in a qualified newspaper of general circulation in the city. If there is no
qualified newspaper, the clerk must post it in at least three public places in the
city.
It is not necessary to publish individual disbursements of less than $300, if
disbursements aggregating $1,000 or more to any person, firm or other entity
are set forth in a schedule of major disbursements showing amounts paid out, to
whom, and for what purpose, and are made a part of and published with the
financial statement.
Minn. scar. ~ 471:698. Small cities (less than 2,500) are now allowed to publish a summary of their
financial statements in a form prescribed by the state auditor.
Tvfinn. Star. § 471.ti9S, snbd. t(~i~. The clerk must submit, within 90 days after the close of the fiscal year, a copy
of the statement to the state auditor in such .summary form as may be prescribed
by the state auditor.
2. Cities over 2,500 population
Minn. star. 0 471.697. In any city with a population of more than 2,500, according to the latest federal
See OSA web site for financial census, the clerk or chief financial officer must prepare an annual financial
statement form pursuant io Minn. report and statements in accordance with Minn. Slat. § 471.697.
slat. § 471.697.
Minn. Slat. ~ 471.697, sued. ~(:~~. At the close of the fiscal year, the clerk or chief financial officer must prepare
the financial report covering the city's operations during the preceding fiscal
year. The report must contain financial statements and disclosures that present
the city's financial position and the results of city operations using generally
accepted accounting principles.
Minn. slat. § 471.697, suba. i(u>. The clerk must file the financial report in his or her office for public inspection,
and present it to the city council after the close of the fiscal year. One copy of
the report shall be furnished to the state auditor after the close of the fiscal year.
Guidelines for Preparing Ciry Budgets 2007
sr
-90-
Minn. Slat. § 471.697, Stand. ~~~>, Within 180 days after the close of the fiscal year, the clerk must submit to the
state auditor audited financial statements that have been attested to by a certified
public accountant, public accountant or the state auditor. The state auditor may,.
upon request of a city and a showing of inability to conform, extend the
deadline. The state auditor may accept this report in lieu of the copy of the
report filed by the clerk in his or her office for public inspection.
Minn. Slat. § 471.697, enbd. i(c). A copy of the audited financial statement along with any management letter or
other written findings or comments by the auditor must be provided to each city
councilmember and the mayor no later than 30 days after the report is required
to be .submitted to the state auditor, and presented at a scheduled meeting of the
city council prior to Oct. 31 of the year in which the report is submitted to the
state auditor.
A~inn. star. ~ a~1.~97, snba. r(a). The financial report, or a summary of the report, must be published using the
state auditor's recommended form in a qualified newspaper of general
circulation in the city. If there is no newspaper, the clerk must post copies in
three of the most public. places in the city. This rriust be done no later than 30
days after the report is due to the Office of the State Auditor.
E. Municipal liquor financial statement
Minn. star. ~ 4zi.69as. Cities that operate municipal liquor stores must publish a balance sheet with a
statement of liquor store operations within 90 days after the end of the fiscal
year. At the option of the city council, the statement may be incorporated into
the general financial reports published by the city.
Minn. Stat. ~ d71b985,subd. ~. The statement must be written in clear and easily understandable language and
must contain the following information: total sales, gross profits, profits as a
percent of sales, operating expenses, operating income, contributions to and
from other funds, capital expenditures, .interest paid, and debt retired. The state
auditor prescribes the form and style of the statement.
Minn. st;u. ~ 4~z.69ss, Sava. 2. Cities with stores having total sales in excess of $3.50,000 must submit within
180-days -after the close of the fiscal year audited financial statements to the
state auditor attested to by a certified public accountant, public accountant or
the state auditor. The state auditor may provide a time extension.
F. Enforcement power of state auditor
:Minn. star. ~ a~i.sv9. If a city fails to file a financial statement or report required under Ch. 471 by the
due date, the state auditor is authorized to send personnel to the city or to
contract with a private firm to complete and file the financial statement or
report. The city will be charged for these expenses. If the city fails to pay these
charges within 30 days of billing, the state auditor will notify the commissioner
of finance, who will then deduct this amount from any state aids or shared taxes
owed to the city. The state auditor's annual report on cities includes a list of all
cities failing to file a financial statement or report.
Please note: The state auditor will withhold state aid for cites that do not submit
required financial statements or reports!
Mian. Stns. g a~i.499s. A special exception to the deadlines for filing exists for cities located in areas
that have been declared disaster areas.
82
League of Minnesota Cities
_g~_
G. .City reporting under Minn. Stat. § 6.74
Minn. Brat. § (i.74. Cities are required to report their financial activities annually to the Office of
State Auditor under Minn. Stat. § 6.74. The OSA .collects financial data that is
used to provide uniform data to the Legislature, the Minnesota Department of
Transportation, the U.S. Census Bureau, and other interested parties.
See OSA financial reporting forms The OSA sends out reporting forms to city clerks to be used to collect financial
under Minn. Stat. § 6.74:
data. One form is for cities with audited financial statements prepared in
GAAI'. accordance with generally accepted accounting principles (GAAP). Another
cash Basis. form is sent to cities using the cash basis of accounting.
Ir4inn. scat. § 6,7a. Cities should ensure the forms are filled out properly and returned promptly.
Minn. Stat. § bs3. Anyone who refuses or neglects to obey lawful direction of the state auditor
maybe guilty of a felony with a minimum penalty of $3,000 or imprisonment..
Completion of these forms pursuant to Minn. Stat. § 6.74 does NOT relieve
cities of their responsibilities to prepare and publish financial statements under
Minn. Stat. §§ 47].697, 471.698 or 471.6985.
H. Development fee reporting
Mann: scat. § tEB.eRS, Minnesota statute mandates an annual report to the state regarding municipal
development and construction fees and costs associated with services related to
these activities. The filing deadline is June 30, and cities that collect $5,000 or
less in fees do not have to file this report.
I. Other types of financial reports
see Cn. 27 of tue League's In addition to statutorily required financial reports; cities may also prepare other
t-landbook for Minnesota cities. kinds of financial reports. Cities prepare financial statements necessary for
administrative and budgetary purposes, and financial statements used to inform
the public about the city's financial condition.
J. Audits
Minn.,Stat. § 471.G47, sut~d. t. As noted above, all cities with a population over 2,500 must submit an audited
annual financial report to the state auditor. Further, ali statutory cities that have
a combined clerk-treasurer position must have an annual audit if city revenues
Minn. Scat. § 4 [2581, suba. z, exceed $150,000 adjusted for inflation using the annual implicit price deflator.
A4inn. Stat. § 413.0?, suUd: 3 (For 2007, the annual implicit price deflator (IPD) is 6.4187. If the city's
revenues are less than threshold, an audit is required once every five years and
the person doing the auditing will select the year to be audited.
Guidelines for Preparing Ciry Budgets 2007
83
-92-