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1. Property Assessements.I , CHAPTER 21 Part VI Finance, budgeting and debt Chapter 21 Sources of revenue There are several major sources of revenue for cities. This chapter will discuss these sources. In order to develop and implement a city budget, the council should consider all of these sources. Sources of revenue are as follows: • Taxes • Local government aid • Homestead and agricultural credit aid (HACA) • Local performance aid • Equalization aid • Disparity reduction aid • Fire and police service state aid • Highway user fund • Federal and state grants -in -aid • Charges for services • Regulatory revenues • Gifts • Interest income • Enterprise funds • Investment of idle funds 485 HANDBOOK FOR MINNESOTA CITIES Borrowing How this chapter applies to home rule charter cities Taxes Although city revenue sources are more diversified, the property tax accounts for approximately 30 percent of city revenues and remains the primary way to raise city revenues. This section discusses the property tax as a revenue source. (Chapter 23 explains the property tax levy process.) Authority to tax Minn. Const. art. X, § 1. The essential features of Minnesota's tax system are in the Constitution which vests all taxing authority in the Minnesota Legislature. Without legislative authorization, cities may not levy any taxes under their own authority. Within this constitutional structure, the Legislature alone has the authority to establish a state and local tax system. All city taxing authority is subject to legislative change or revision. Because the property tax provides the greatest percentage of city tax revenue, it will be discussed first. The Legislature has authorized Minnesota cities to levy and collect taxes on real property, some utilities, gambling and lodging. This authority usually has its limits and is always within the framework of the entire state -local fiscal relationship. As a consequence, annual legislative action frequently results in substantial changes in the tax system. Role of the property tax There are, essentially, only three kinds of taxes: government levies against what a person earns, owns or spends. The income tax is an example of the first, while the sales tax represents the last. The property tax, levied against real or personal property, is a tax against the wealth a person owns. Because most property is relatively fixed in location and because the U.S. Constitution makes its use impractical on the national level, the property tax has been primarily a tool for local governments. Consequently, it has become the backbone of local revenue systems. 486 CHAPTER 21 State law has restricted city governments to levying taxes against real property. Real property is basically the land and its improvements, if any, in contrast to personal property such as cars, jewelry and other easily movable items of value. Most cities depend on the property tax for much of their operating revenues. Many considerations of equity are involved in the property tax concept and process. For these reasons, local officials should be familiar with the tax itself, with their charter tax levy limits and authorizations, if applicable, with the details of its execution, and with the maintenance and improvement of the tax base. Intergovernmental problems The property tax supports many governmental jurisdictions. Through the property tax, the average homeowner pays for the support of the city, school district, county and any special districts such as sanitary districts, housing and redevelopment authorities, hospital districts, watershed districts, soil and water conservation districts, and park districts. This multiplicity of taxing jurisdictions creates problems, including the taxpayers' confusion regarding who is using their money. For example, people often criticize city governments for tax increases when, in fact, the city decreased its tax rate while other taxing jurisdictions increased their tax rate. Real and personal property taxes Minn. Stat. § 272.03, subd. I; Minnesota law defines the term "real property" as the land itself Minn. Stat. § 272.04. plus all buildings, improvements and other fixtures on the land; all rights and privileges pertaining to it; and all mines, mineral quarries, fossils and trees on or under the land. The statutes state that wealth connected with the land, such as minerals, may be separately owned and taxed as real estate. Minn. Stat. § 272.03, subd. 2; The term "personal property" refers to all detached or Minn. Stat. § 272.02. detachable, moveable property, including furniture and other personal belongings, as well as commercial inventories and equipment a business uses to produce income. Virtually all personal property is exempt from taxation. 487 HANDBOOK FOR MINNESOTA CITIES Minn. Stat. § 272.02, subd. 1. All real property in the state is taxable as property under the laws of Minnesota, with certain exceptions. The city has no authority to determine what property is taxable, nor in what proportions or amounts. The Legislature alone prescribes the procedures to follow, and sets all rates and exemptions. The assessor and the local board of review only have authority to determine valuations in accordance with the procedures the Legislature has prescribed. Minn. Stat. § 273.01. Assessors must list all real property that is subject to taxation. The county or city assessor must assess at least one -fourth of the listed parcels each year, providing reappraisal of each parcel at maximum intervals of four years. The assessor's list must include all real property becoming taxable in any year with reference to its value on January 2 of that year. Property tax process The steps in levying property taxes begin with instructions to local assessors, and end with the tax settlements made by the county auditor. Minn. star. § 274.01. Between April 1 and May 31, or later if the commissioner of revenue gives an extension, the local board of review must hold a meeting. The governing body is the board of review, except in cities whose charters provide for a board of equalization. The board examines the assessor's list to determine if it accurately lists all taxable property. Minn. Stat. § 274.04. By the first Monday in May, the assessor must have delivered the completed assessment books to the county auditor. Minn. Stat. § 274.13; Minn. State statutes specify when county boards of equalization must Stat. § 270.12. meet to examine and compare the assessment of property within the county, and equalize them so that each tract or lot is assessed at its market value. Action a board takes after adjournment is not valid unless the commissioner of revenue approves a longer session. The law also specifies when the state board of equalization meets. Minn. Stat. § 275.07, subd. 1. On or before five working days after December 20 each year, the city council must set the tax levy for the next year and send a certified copy to the county auditor. If a city fails to do this, the county auditor will levy the amount that the city levied in the previous year. 488 CHAPTER 21 Minn. Stat. § 273.03; On or before the first Monday in December, the local assessor Minn. Stat. § 276.01. must receive the property assessment books. Also before that date, the county auditor spreads the city's tax levy on all taxable property in the city. On or before the first business day in March, the county auditor delivers the tax records to the county treasurer who then collects the tax. Minn. Stat. § 276.09; Minn. On or sometime shortly after May 20 of each year, the county Stat. § 276.11. treasurer pays the city its portion of all monies the county received from the levy and collection of taxes. Property tax distributions - -the estimated collections that the county treasurer makes to local jurisdictions - -must include taxes, special assessments and any penalties and interest due to the taxing jurisdiction. The treasurer or fiscal officer of any taxing district may appeal the county treasurer's estimated collection to the county board, if the local official believes the amount is incorrect. Assessment of property There are four steps in the assessment of property: appraising property to determine its full and true value; classifying property to establish its tax capacity category; equalizing valuations to reduce inequities; and reassessing property. Assessment officials Minn. Stat. § 273.062. In addition to members of boards of review or equalization, the state, each county and some cities have an official responsible for property assessment. Any county may require the county assessor to assess all property, except for property in cities over 30,000 population. State and county officials Minn. Stat. § 270.06; Minn. The state commissioner of revenue administers assessment laws, Stat. § 270.16; Minn. Stat. § striving for a fair and equal assessment of all property in the 270.26; Minn. Stat. § 270.11. state. The commissioner's duties include instructing assessors, satisfying grievances, and refunding taxes if the county board and the county auditor recommend such action; ordering the reassessment of any real or personal property; and requiring cities to supply information relating to property assessment and tax collection. The city, or any person directly interested in the order, may appeal an order to a special board of tax appeals. 489 HANDBOOK FOR MINNESOTA CITIES Minn. Stat. § 273.061; Minn. The assessment official at the county level is the county assessor Stat. § 273.08. who makes the final determination of the value of all property subject to assessment and taxation. If the city has its own assessor, that person views and appraises the property. However, the county assessor assigns all book work and final evaluations. The county assessor must determine the assessed value of all property in the county, and prepare all necessary assessment books and records. Minn. Stat. § 273.064. The county assessor must examine the assessment appraisal records of each local assessor any time after December 1 of each year and must notify the local governing body of any deficiencies. If the local assessor does not correct the deficiencies within 30 days, the county assessor, with the approval of the commissioner of revenue, may do so. The auditor may charge the local unit for the work. If the local unit doesn't pay by September 1, the county auditor may levy a tax against property in the local unit. Minn. Stat. § 273.065. If districts do not complete their assessments by February 1, the county assessor will do the work and charge accordingly. (These provisions do not apply in cities over 30,000 population.) City assessor Minn. Stat. § 273.08. If a city has a local assessor, that person must place valuations on all taxable real property in the city. To do this, the assessor receives the necessary assessment books and blanks annually from the county auditor, on or before the first Monday in December of each year. The city assessor must complete the work and return the books to the county auditor either on or before the first Monday in May, or after the last meeting day of the city board of review -- whichever is later. Instructions for these duties are available from several sources, including an annual meeting with a representative from the state Department of Revenue. Assessors may obtain valuable assistance from the Assessor's Manual, a book available from the commissioner of revenue. The Minnesota Board of Assessment establishes courses and approves classes offered by schools, colleges and universities. When in doubt about the valuation of a parcel of property, a local assessor should seek aid from the county assessor. The local assessor should always be reasonably certain before placing valuations on property, and should not hesitate to seek whatever aid is necessary. 490 CHAPTER 21 Joint assessment under contract Minn. Stat. § 273.072. Any city that is completely within a county and separate from a township may enter into either of two kinds of agreements that allow someone other than a local assessor to assess the property. The city may contract with the county to have the county assessor assess property, or the city may participate in an agreement with another city or town. Under such an agreement, either governmental unit could employ an assessor, or they could jointly employ an assessor to assess property in both jurisdictions. Minn. Stat. § 471.59. The local units must make these contracts or agreements under the terms of the Joint Powers Act, and the commissioner of revenue must approve them. Valuation of property Minn. Stat. § 273.11, subd. 1. Assessors must value all property at its market value. The statutes define market value as the usual selling price in that location at the time of assessment. It is the price a seller could obtain at a private sale and not at a forced or auction sale. Market value is not necessarily the same as original cost or intrinsic value. The assessor has authority to consider other value - producing factors in assigning value to property. Property tax classifications Minn. Stat. § 273.13. Property tax classifications are set by state statute. (See Appendix H in Guidelines for Preparing City Budgets, LMC 215b.1, for a detailed listing of the different classifications.) Exempt property Minn. Const. art. x § 1. Minn. Several classes of property are exempt from property taxation, Stat. § 272.02. but not necessarily from special assessments. Some of these property classes include: • Public burying grounds; • Public schoolhouses; • Public hospitals; • Academies, colleges, universities and seminaries of learning; • Churches, church property and houses of worship; 491 HANDBOOK FOR MINNESOTA CITIES Minn. Stat. § 272.02, subd. Institutions of purely public charity; 1(6). Minn. Stat. § 272.02, subd. Public property, including all city -owned property, for 1(7). exclusive public purpose use; and, • Real and personal property for the abatement and control of air or water pollution. There are a number of other specific types of properties listed as exempt from property taxes. (For a detailed list, see Minn. Stat. § 272.02.) A.G. Op. 474d (Aug. 28,1961). Local governments in Minnesota may not exempt any land from taxation for the purpose of attracting or keeping industry Equalization procedures Once the assessors have completed their work, the city, county and state levels of government review and modify the assessments with limitations. During this review, two kinds of corrections are possible: the governing body may check the assessor's lists for accuracy, hear individual complaints and make any necessary adjustments; and, the governing body may equalize the ratio of market to assessed market values. The first function is the sole concern of the city board of review, while the county and state boards devote more time to the latter task. When the entire procedure is complete, the county auditor puts the valuations in the records to use when making up the tax rate figures. Only when all three levels of government have reviewed and equalized the assessments, do they become the official assessed values. City board of review Minn. Stat. § 274.01, subd. The city council may serve as the board of review in cities. The 1(a). town board serves as the board of review for a town. Minn. Stat. § 274.01, subd. 2. The city council may appoint a special board of review. It may delegate to the board all of the powers and duties the council would have if it acted as the board of review. The members of the special board of review serve at the direction and discretion of the council. The council determines the number of members, the compensation and expense payments, and the term of office. At least one member of the board must be an appraiser, realtor or other person familiar with property valuations in the assessment district. 492 CHAPTER 21 Minn. Stat. § 274.01, subd. The board of review meets in the city clerk's office. The city 1(a), (d). assessor and the county assessor must attend this meeting with their assessment books and papers. These officials may take part in the proceedings, but may not vote. Minn. Stat. § 274.01, subd. The meeting date of the board of review must be between April 1(a). 1 and May 31, and is fixed by the county assessor on or before April 1 of each year by giving written notice to the city clerk. After receiving the notice, the clerk must give published and posted notice of the meeting at least 10 days before the date of the meeting. Minn. Stat. § 274.01, subs. A majority of the members may take action at the board of 1(0" review meeting, and may adjourn the meeting from day to day for a period of 20 days until they complete their work. After 20 days, the board has no authority and any action it takes is invalid unless the commissioner of revenue has granted an extension. Minn. Stat. § 274.01, subd. In fulfilling its role, the board of review has three main 1(b). functions: It must review the assessor's list, making sure that all taxable property in the city has been properly placed on the list. It must review the assessor's valuations, striving to standardize the ratio between market value and adjusted market value for each individual piece of property. To accomplish this, the board may raise or lower valuations on individual properties, but it cannot increase valuations without notifying the property owner and giving that person an opportunity to be heard. • The board must hear and settle the complaints of individual property owners regarding the valuations on their property. Minn. Stat. § 274.01, subd. If a person fails to appear in person or through counsel or t(e). written communication before the board of review after receiving notice of intent to raise the assessment, or if a person fails to apply for a review of the assessment, that person may not appear before the county board of equalization for a review of the assessment. An exception is when the assessment takes place after the meeting of the board.of review, or when aggrieved individuals can establish that they did not receive notice at least five days before the local board of review meeting. 493 HANDBOOK FOR MINNESOTA CITIES Minn. Stat. § 274.01 subs. The local board of review may not reduce the total or aggregate 1(C) amount of the county assessor's assessment by more than one percent. This means that the board must often compensate for reductions in assessed values by making comparable increases in assessments against other parcels of property. Minn. Stat. § 274.01 subd. All complaints about an assessment or classification made after 1 (� the meeting of the board must be heard and determined by the county board of equalization. County board of equalization Minn. Stat. § 274.13. The county board of equalization consists of either the county auditor and the county commissioners, or a special board of equalization appointed by the auditor and the board of county commissioners. The statutes establish meeting dates. Although the county board of equalization may decrease and, after notice to the taxpayer, increase individual valuations, its primary task is to equalize the ratio between market value and assessed market value in the various districts. The county board of equalization's main purpose is to secure uniformity of assessed value from district to district, with only occasional attention to uniformity between taxpayers within any one district. The board may not reduce the aggregate valuations of either real or personal property in the county below the amounts the assessors have determined, but it may increase these amounts. Minn. Stat. § 375.192. Upon the property owner's application, the board may change a property's homestead classification or reduce its market value, reducing or refunding any taxes the person has already paid. State board of equalization Minn. Stat. § 270.11, subds. 1 , The commissioner of revenue acts as the state board of 6. See also, Minn. Stat. § equalization. The commissioner's primary assessment task is to 274.13, subd. 1(a). ensure uniformity of valuations between counties. The commissioner may adjust valuations between districts and between classes of property. The commissioner may raise or lower individual assessments, but may increase individual assessments only after the taxpayer has received notice and has had an opportunity to be heard. The commissioner may not reduce the aggregate value of all property in the state by more than one percent below the total the county boards of equalization have reported. The commissioner may order a reassessment of property in any district. 494 CHAPTER 21 Appeals to tax court Minn. Stat. § 271.01. The tax court is the final authority for the hearing and determination of all questions under the property tax laws of the state, except for an appeal to the Supreme Court. The tax court has jurisdiction in cases dealing with property taxes only after the taxpayer has appealed the valuation or assessment to the town or city board of review and to the county board of equalization, except for those taxpayers whose original assessments came from the commissioner of revenue. The tax court has no jurisdiction involving an order of the state board of equalization unless a taxpayer contests the valuation of the property. The tax court must hold hearings at any place in the state so that taxpayers may appear before the court with as little inconvenience and expense to the taxpayer as possible. Minn. Stat. § 271.21. The small claims division of the tax court has jurisdiction in any case concerning the valuation, assessment or taxation of residential property the taxpayer has homesteaded, and of non- homesteaded property if the estimated market value is less than $100,000. The small claims division also hears cases concerning the tax laws in which the amount in controversy does not exceed $5,000, including penalties and interest. The notice that goes to the taxpayer of the assessment, determination or order of the commissioner or the appropriate unit of government, should include written notice that the taxpayer has the right to appeal to the tax court and, if applicable, to the small claims division. Other taxes As mentioned earlier, the Legislature has granted cities the authority to impose some utility taxes and taxes on lodging, as well as special sales taxes for some cities. (These are discussed more fully in the League's Preparing City Budgets memo.) 495 Local government aid Minn. Stat. § 477A.013; Local government aid (LGA) is a state aid to local governments. See League memo, Guidelines for Preparing City Budgets LGA has undergone several changes since its creation in 1971. 215b.1, for a more detailed LGA has replaced most of the individual taxes, such as discussion of LGA. cigarette, liquor, bank excise and gross earnings taxes, that the state previously distributed to local governments under various laws. LGA, like other aspects of the state tax system, is now manipulated by the Legislature annually. 495 HANDBOOK FOR MINNESOTA CITIES Minn. Stat. § 477A.015. Cities receive their LGA in two equal payments on July 20 and December 26. A city may request an advance of the December payment from the commissioner of revenue if it has a cash flow problem. Minn. Stat. § 471.697; Minn. Since the stated purpose of local government aid is to provide Stat. § 471.698. property tax relief to local governments, the law provides for uniform accounting and reporting standards for cities over 2,500, and uniform reporting requirements for cities under 2,500 population. Homestead and agricultural credit aid (HACA) Minn. Stat. § 273.1398, subd. Homestead and agricultural credit aid (HACA) replaced the 2. homestead and agricultural credit programs beginning in 1990. The distribution design of the program is different, however. Whereas the original credit programs provided relief directly for the taxpayer, HACA is designed to provide relief to local governments to pay for tax rate reductions for certain classes of property. For example, under the credit programs if the class rate on low- valued homes was reduced, it would usually cause an increase in taxes for other property. In contrast, under the new system HACA payments would increase in an attempt to prevent such tax burden shifts. Not all reductions in class rate changes will be paid for through the HACA program. Minn. Stat. § 273.1398, subd. The Department of Revenue will notify cities of their HACA 6. distribution on or before September 1 of each year. This deadline ensures that the HACA distribution can be included in the budget before the preliminary property tax levy must be established on September 15. Cities will receive their HACA in two equal payments on July 20 and December 26. 496