8 Legislative Update CITYOF
CH I SE
690 City Center Drive
PO Box 147
Chanhassen, Minnesota 55317
Phone
952.937.1900
General Fax
952.937.5739
Engineering Department Fax
952.937.9152
Building Department Fax
952.934.2524
Web Site
www. ci. cha, hassen, mn.,s
TO:
FROM:
DATE:
Mayor
City Council
Todd Gerhardt, Acting City Manager ~.~
July 19, 2001
SUB J:
Legislative Update
The 2001 legislative session made major changes in the way property taxes will
be calculated beginning with taxes payable in 2002. Due to the number of
modifications, staff is still trying to understand all of the changes. Bruce
DeJong and I will be attending several informational sessions at the League of
Minnesota Cities and a seminar sponsored by Springsted in the next two weeks.
In the meantime, I have attached a summary of the legislative action that was
prepared by the League of Minnesota Cities for your review. Some highlights
you should be aware of include:
.
Due to significant changes, the requirement for taxing jurisdictions to
hold Truth-in-Taxation public hearings in 2001 (for taxes payable in
2002) has been waived. However, the hearing will be required again in
2002 (for taxes payable in 2003).
.
Levy limits were imposed for the next two years. The good news is that
with this change, the city will be able to carry forward unused levy
authority from previous years.
o
The City of Chanhassen will see a dramatic net loss in local govemment
aid (specifically HACA [homestead/agricultural credit aid]) equaling
$1,069,163 (see Attachment//2). However, the net decrease in our
LGA/HACA for 2002 will not count against the new proposed levy limit.
This change will result in an increase in the city's portion of the levy to
make up for the loss in HACA; however, in spite of this, the city's
residential and business community will see a double-digit tax decrease
overall.
I know this is confusing and therefore I will try to put together an
illustration for Monday night's meeting.
Staff will provide further details of legislative changes as they become available
and will include them as a part of our next budget meeting in August.
gAadmin\tg\legislative changes.doc
}e Cit~ of Chanhassen. A Ovu,t)ze commu,ig, with clean lakes, aualit¥ schools, a cham~in~ downtown, thrivin¢ businesses, and beautihd oaths. A creat o/ace to live. work. and o/m~
Number 24 July 11,2001
Finally Over: The other 2001 odyssey
Gary Carlson
Early on the morning of June 30, less
than 24 hours before many state
agencies were scheduled to shut down
due to lack of appropriations, the
2001 Legislature finally completed its
xvork. The final gavel on the House
and Senate floors marked the culmi-
nation ora special session and the
regular session that lasted nearly six
months--one of the longest periods
the Legislature has needed to complete
work on the state budget.
Under the state's constitution,
the regular session was scheduled to
conclude May 21.That deadline
passed without agreement between
the governor, House, and Senate on
the parameters of the tax and spend-
ing bills. For the next three weeks,
House and Senate leadership occasion-
ally met with the governor, but little
progress toward conclusion was reached.
The governor did not call a special
session until June 11 and even then,
the special session convened without
even the hint of agreement. It wasn't
until the governor instructed his staff
to compile a compromise proposal
that the major logjam was finally
broken. The negotiations on a variety
of smaller, contentious pieces of the
state budget and tax bill continued
until the final gavel.
If you enjoyed the drama and the
intrigue of the 2001 session, don't
worry. It is all scheduled to start again
Jan. 30, 2002, when the Legislature
convenes for the second half of the
biennium.
Contributing factors
The 2001 session began with the
prospect of major changes in the
state's tax system. The November state
budget forecast promised another
strong two-year period for the state's
budget, with significant state surplus
revenues. In addition, the governor's
staff had concluded their year-long
effort to recommend major changes
to the state's tax system--particularly
the property tax. In late January, the
governor unveiled the Big Plan tax
reform proposal to a crowd of
legislators and media at the Science
Museum in St. Paul.
Meanwhile, the Senate was under-
going one of the most profound
transformations in many years. Due to
a self-imposed chair term limit rule
adopted several sessions ago and the
retirement of several sen/or senators,
the Senate ,,vas required to appoint
new chairs for nearly all the Senate
conunittees. No longer would Sen.
Doug Johnson chair the Tax Commit-
tee. No longer would Larry Pogemiller
chair the K-12 Committee. No longer
would Carol Flynn chair the Trans-
portation Committee. This transition
would undoubtedly add to the flavor
and intrigue of the 2001 session.
The House of Representatives
had its own set of challenges. The
speaker and majority leader had to
address the concerns and desires of
many different flanks of the House
Republican caucus. In fact, one member
of the House majority commonly
referred to Rep. Tim Pawlenty as the
"plurality" leader, rather than the
majority leader.
One additional development that
affected the session--the setting of
committee deadlines. The House and
Senate agreed to committee deadlines
that were extremely close to the
constitutionally-mandated session
deadline. The added time before the
deadline allowed more bills to survive
late into the session and ultimately
limited the amount of time the major
conference committees could work
out differences.
Tax bill evolution
Early in the session, the governor's Big
Plan was the only game in town. The
Continued on page 3
LIVIC to present a complete overview of state legislation and how
it impacts cities---see page 7 for details.
Continued from page I
governor was proposing an elimination
of the state-mandated general educa-
tion property tax, class rate compres-
sion, an elimination of HACA, a new
homestead credit, a new LGA formula,
and a repeal of the sales tax on local
govermnent purchases. The governor
also proposed several controversial
ideas such as a local government
service fee assessed against non-profit
properties.
The House and Senate spent a
tremendous amount of time consider-
ing the proposal. The House and
Senate even held hearings around the
state to gather citizen input on the
proposal. After spending most of
February and early March on the
governor's tax plan, the House was the
next to compile their tax recommen-
dations into an omnibus bill.
The House proposal shared many
characteristics with the governor's plan,
but also contained distinct differences.
Similar to the governor's plan, the
general education property tax was
eliminated, classification rates were
compressed, HACA was eliminated
while LGA was increased. However,
for cities, the House proposal included
levy limits and a reverse referendum
component, and did not include the
elimination of the sales ta',: on local
purchases.
The Senate waited more than
another week to complete their
version of the tax bill. Their proposal
was far less aggressive in changing the
property tax system, at least partially
due to the fact that the Senate was
allocating more resources to other
spending priorities. The Senate
proposal made more modest changes
to the classification system, and added
resources to the LGA formula that
included folding a significant portion
of HACA iuto the base LGA formula.
Final outcome
The final tm: bill is largely based on
the governor's final compromise
proposal and includes, among other
provisions, a state takeover of the
general education property tax lew,
$140 million appropriation increase
for LGA with several formula changes,
leW limits for counties and cities over
2,500 population for two years, the
repeal of HACA, a new state property
tax, class rate compression, and a new
market value homestead credit. The
compromise does not include a reverse
referendum component.
The bill provides the bulk of
property tax relief throttgh the elimina-
tion of the general education property
tax levy. This will reduce property
taxes by approximately $1.2 billion.
In addition, the tax bill will increase
the general education funding level by
folding a portion of existing school
operating referendum levies into the
general education aid formula.
Homeowners will receive
additional tax relief through a new
$319 million market value homestead
credit, and agricultural land will
receive $17 million of relief through a
new ag land credit. Homeowners will
also receive additional tax relief
through an expanded property tax
refund.
For cities, the bill implement
significant changes to the state's
property tax and state aid systems.
Homestead and agricultural credit aid
(HACA), which currently provides
$200 million in state aid to cities, is
eliminated. The property classification
system is substantially modified and
class rates are compressed. Levy limits
are implemented for two years, and
the LGA formula is modified and the
appropriation is substantially in-
creased. Below is a brief summary of
several of the most significant changes
affecting cities.
Local Government Aid
The LGA formula changes include an
appropriation increase of $140 million,
an increase in the "local effort rate" to
reflect the increase in municipal tax
rates due to the loss of HACA, a new
one-time increase limit for cities of
the first class equal to 102.5 percent of
their 2001 LGA plus HACA, and a
one-time limitation for all other cities
equal to 40 percent of the sum of its
net levy for taxes payable in 2001 plus
its 2001 HACA.
For non-metro cities over 10,000
population, the city aid base is increased
in 2002 by the lesser of $60 times the
popuhtion over 5,000 or $2,500,000.
The maximum increase permitted in
2002 is also adjusted to reflect this
increase.
The bill includes special LGA
adjustments for the cities of Osseo,
Hopkins, and Newport.
The 1993 aid base (grandfather)
remains in place, but a number of
cities will receive less LGA in 2002
than they received in 2001 due to the
effect of the other formula changes.
Although the tax bill contains an
LGA reform account that will receive
$14 million beginning in 2003, it does
not contain any formal reform study
language. During negotiations on the
bill, the tax chairs had discussed a
possible interim study to redesign the
formula to account for newly available
demographic data from the decennial
census.
We will have a copy of various
computer simulations related to the
impact of the bill on LGA available
on the League's web site at www.
lnmc. org.
Levy limits
Under the bill, levy limits are imposed
for two years. The pay 2002 levy limit
will be equal to the greater of a limit
computed with the actual 2001 levy
plus 2001 state aids increased for one
year of growth adjustments (see
definition below) or the pay 2000 leW
plus 2000 state aids increased for two
years of growth adjustments.
The first calculation will generally
benefit those cities that enacted larger
levy increases for taxes payable in
Continued on page 6
July 11, 2001 Page 3
Continued from page 3
2001 while the second calculation will
generally benefit those cities that
enacted smaller levy increases in pay
2001 and earlier years due to the fact
that unused leW authority from those
previous years is carried forward.
The growth adjustment includes
three factors: 1) the annual percentage
increase in households within each city;
2) the percentage increase in inflation
as defined by the implicit price deflator
(an infafion adjustment); and 3) the
annual percentage increase in new
construction of commercial and indus-
trial property within the city. The
household growth and the commercial-
industrial growth factors are specific
to each city, while the IPD is a general
inflation adjustment that is currently
estimated to be 4.3 percent for 2001
for the 2001 leW limit base and 3.36
percent for the 2002 law limit year.
The leW limit calculation is based
on the sum of property taxes and state
aids and, therefore, levy limits automati-
cally adjust the property tax law
authority for each dty based on changes
in state aids. For example, cities that
have a net decrease in LGA and
HACA for 2002 will automatically be
provided additional leW authority due
to the loss of state aids. Cities that will
receive a net increase in state aids will
have their overall leW authority
relatively reduced.
Table 1 illustrates the impact of
aid changes on three hypothetical
cities with identical current property
tax levies, state aids, and growth
factors. The city with an aid reduction
would receive additional leW author-
ity to cover the lost state aids. The city
with no net change in state aids would
receive aleW increase due to the
application of the growth adjustments.
The city with the aid increase would
actually have its law authority reduced
to account for the increase in state aids.
Finally, the leW limits are structured
so that ifa city does not use all of its
leW authority in any year, that author-
ity is carried forward as additional leW
authority in subsequent years. Cities
can also exceed the leW limit by
passing a local referendum.
The bill exempts leW increases
necessary to fund employer contribu-
tion increases for the PEKA coordi-
nated plan. The mandated employer
increase contained in the omnibus
state departments bill is .35 percent
effective Jan. 1, 2002.
For metropolitan area cities that
currently leW for transit costs, their
levy limit base is reduced by the sum
of their payable 2001 non-debt opt-out
transit levy plus non-debt opt-out
transit HACA.
The Department of Kevenue will
be requesting the necessary information
Table 1:
Impact of Aid Changes on the Levy Umits of Three Hypothetical Cities
City with
Aid
Decrease
Pay 2001 Levy $100,000
Pay 2001 State Aids 50,000
Subtotal (A+B) 150,000
'Groxvth Adjustments 5,000
Pay 2002 Levy Limit Base 155,000
(C+D)
Pay 2002 State Aids 40,000
2002 Levy Limit (E-F) 115,000
City with City with
NoFlet Aid Aid
Change Increase
$100,000 $100,000
50,000 50,000
150,000 150,000
5,000 5,000
155,000 155,000
50,000 60,000
105,000 95,000
Note: This example is simplified to reflect only the impact of changes in state aid payments to each city.
The illustration does not accottnt for changes in "special levies" that u,ottld be outside levy limits.
to compute levy limits and e.,dsting
special levies in early July. The cities
and counties will have to reply by July
20, 2001, or their levy limit will be
computed solely based on the pay
2000 levy limits.
Truth-in.taxation
The bill makes several changes to the
proposed property tax notices, although
many of these changes will not take
effect until fall 2002. The one-time
changes for this fall's T-N-T process
are based on concerns raised by county
auditors about the difficulty of
reprogranuning their computer
systems due to the late conclusion of
the session.
For 2002 Only: The T-N-T
hearings that would have otherwise
been required this fall ,,viii not be
mandatory. A city can choose to hold
a hearing; however, if a hearing is
held, the normal procedures, including
the publication/posting and content
of the meeting, must be followed.
The parcel-specific notice will be
simplified to give the counties more
time to reprogram their computer
systems. The distribution of the notice
will also be delayed until mid-Decem-
ber. The required form of the notice
should minimize taxpayer concerns
about city levy increase due to the loss
of state aid. The modified 2002 parcel-
specific notice will contain itemized
property tax information for each
local unit of government based on the
proposed 2002 property tax leW. How-
ever, the only comparative information
on the notice vail be the current total
pay 2001 tax liability (the combined
city, county, school, and special district
taxes due). Therefore, although the city
levy will increase in many communities
due to the loss of HACA, a compari-
son of the 2001 actual city tax and the
2002 proposed city tax will not be
reported on the notice.
Continued on page 7
Page 6
LMC Cities Bulletin
Continued from page 7
The bill provides the commis-
sioner of revenue with the authority
to grant waivers to counties that have
difficulty complying with the modified
parcel-specific notice requirements.
This provision was added due to the
late conclusion to the legislative
session.
For 2002 and beyond:
· The current truth-in-taxation
hearing requirement that applies to
cities over 500 population is
modified to provide an exemption
if the proposed levy increase is less
than inflation as defined by the
implicit price deflator (IPD) for
government consumption expendi-
tures. Although the hearing require-
ments have been waived for taxes
levied this fall, the IPD is estimated
to be 3.36 percent for pay 2002
taxes. Any city that proposes an
increase less than that amount
would have otherwise been exempt
from the hearing requirement.
· The current requirement that cities
over 500 population adopt a
resolution authorizing a tax rate
increase is repealed for taxes levied
this fall and replaced ~vith a modifi-
cation to the required truth-in-
taxation advertisement. Under the
bill, the advertisement must now
show three tax rates: 1) the current
local tax rate; 2) the proposed rate
if no levy increase is adopted; and
3) the tax rate under the proposed
budget. Note: Due to the fact that the
hearing requirements for this fall are
suspended, this provision udll not take
effect until next year.
· The parcel-specific notices sent to
taxpayers must contain a phone
number for taxpayers to call if they
have questions about the informa-
tion contained on the notice. ~-
Class Rates under the Omnibus Tax Bill
Current
Property Classification Law
Residential Homestead:
Up to $76,000 1.0%
$76,000 - $500,000 1.65%
Over $500,000 1.65%
Residential Non-homestead:
Single unit:
Up to $76,000 1.2%
$76,000 - $500,000 1.65%
Over $500,000 1.65%
2-3 unit and undeveloped land 1.65%
Apartments:
Regular 2.4%
Small city 2.15%
Low-income 1.0%
Commercial-Industrial-Public Utility:
Up to $150,000 2.4%
Over $150,000 3.4%
Electric generation machinery 3.4%
Seasonal Recreational Residential:
Up to $76,000 1.2%
$76,000 - $500,000 1.65%
Over $500,000 1.65%
Proposed
Class Rates
Local State
Tax Tax
1.0%
1.0%
1.25%
1.0%
1.0%
1.25%
1.5% l
1.8% 2
1.8% 2
0.9% 3
1.5% 1.5%
2.0% 2.0%
2.0% n/a
1.0% 4 0.4%
1.0% 4 1.0%
1.25% 4 1.25%
Kate reduced to 1.25% in pay 2003 and thereafter.
Kate reduced to 1.5% in pay 2003 and 1.25% in pay 2004 and thereafter.
Rate increased to 1.0% in pay 2003, classification abolished in pay 2004.
Exempt from referendum market value tax.
Attend LMC legislative review and learn
what happened this session for cities
Jennifer O'Rourke
With the extended 2001 legislative session and significant tax impacts for cities,
the LMC Intergovernmental Relations team has received a record number of
calls from members. In an effort to educate LMC members, IGR staffwill
present a complete overview of state legislation impacting cities July 24 at
9:30 a.m. in the St. Croix Meeting Room at the LMC building. IGR staff
will be on hand to answer any of your legislative questions and copies of
complete law summaries will also be available.
IGK staff presented a partial legislative wrap-up at the annual confe.~nce in
June. However, at that time the Legislature had not finished the major tax and
spending bills, which left room for much speculation on final funding levels and
policy. Conference attendees received the 2001 Law Summaries: Volume I
publication; the new edition will contain all 2001 law summaries.
Space is limited, so an RSVP is required. Please contact Mary
Diedrich at (651) 281-1259 or e-mail: diedrich~lmnc, org with your contact
information. We'll schedule another mini-session if a need is determined. ~.
July 11, 2001 Page 7
BIRD ISLAND
BISCAY
BIWABIK
BLACKDUCK
BLAINE
BLOMKEST
BLOOMING PRAIRIE
BLOOMINGTON
BLUE EARTH
BLUFFTON
BOCK
BORUP
BOVEY
BOWLUS
BOY RIVER
BOYD
BRAHAM
BRAINERD
BRANDON
BRECKENRIDGE
BREEZY POINT
BREWSTER
BRICELYN
BROOK PARK
BROOKLYN CENTER
BROOKLYN PARK
BROOKS
BROOKSTON
BROOTEN
BROWERVlLLE
BROWNS VALLEY
BROWNSDALE
BROWNSVILLE
BROWNTON
BRUNO
BUCKMAN
BUFFALO
BUFFALO LAKE
BUHL
BURNSVlLLE
BURTRUM
BUTTERFIELD
BYRON
CALEDONIA
CALLAWAY
CALUMET
CAMBRIDGE
CAMPBELL
CANBY
CANNON FALLS
CANTON
CARLOS
CARLTON
CARVER
CASS LAKE
CEDAR MILLS
CENTER CITY
CENTERVILLE
CEYLON
CHAMPLIN
CHANDLER
,~. _CHANHASSEN
CHASKA
CHATFIELD
CHICKAMAW BEACH
CHISAGO CITY
CHISHOLM
CHOKIO
CIRCLE PINES
2001
LGA
271,172
5,233
366,442
135,401
1,525,494
21,000
374,316
105,796
862,672
5,784
5,451
9,956
309,517
20,887
2,032
73,746
240,398
2,492,654
71,161
1,153,987
769
51,079
87,790
20,266
2,182,339
2,272,185
12,022
6,697
130,299
106,247
263,806
91,651
42,845
151,424
22,631
8,054
753,533
126,590
424,173
396,850
16,386
104,387
232,688
548,482
33,914
153,415
444,868
42 159
534 956
463 739
74 202
37 658
154 671
46 220
325 989
1 021
60,330
31,338
108,585
625 702
38,145
20,485
569,192
400,436
0
328,295
1,713,884
112,394
276,892
2001
HACA
101,304
4,331
108,407
38,501
1,661,615
6,329
151,356
3,727,749
334,117
2,349
401
1,094
68,014
7,301
969
21,621
40,648
558,007
19,135
128,102
116,311
16,847
36,941
2,841
1,380,106
2,888,157
3,706
2,121
26 240
16 260
54 623
25 187
22 304
72 497
1 565
8 268
238,381
72,185
103,104
3,332,073
3,887
37,860
187,080
119,528
4,875
44,529
225,782
6,005
144,651
280,607
18,228
9,980
53,515
65,636
27,084
346
16,069
t10,028
44,817
935,677
10,189
1,069,163
324,608
148,203
3,633
122,893
532,626
23,485
215,286
2002 LGA
before reduction
for state costs)
397,551
5,859
470,586
181,839
1,169,350
23,891
584,089
105,796
1,187,214
13,212
7,611
11,956
364,488
29,732
2,215
96,693
331,549
3,945,640
90,414
1,345,683
769
86,520
128,740
24,185
2,150,119
2,465,856
19,006
8,874
183,347
162,071
345,655
118,058
55,590
215,497
25,942
11,503
1,224,7O8
180,275
523,036
396,850
20 167
152 361
277 898
712 293
39 730
176 321
506 079
54 144
721 879
626 690
97 028
50 388
22O 5O6
72,142
409,989
2,021
55,831
9,321
151,523
467,750
53,601
20,485
879,556
601,314
0
312,835
2,369,607
139,218
252,833