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3. Finan Model/Land Use Tx Base j j ~ ~ 1 i t , t> CITY OF CHANHASSEN 690 City Cen"r Drive, PO Box 147 Challh,lISen, Minllesota 55317 Pholle 612.937.1900 Geneml Fax 612.937.5739 Ellgilleerillg Fax 612.937.9152 Publi, Safety Fax 612.934.2524 \rÍ>b 1l'll'u',á.chau!Jil5sen.mll,lIs 3, -- MEMORANDUM TO: Mayor and City Council FROM: Don Ashworth, City Manager DATE: July 7,1998 SUBJ: Fiscal Impacts of New Development This memorandum has four components: 1) Overview; 2) Existing tax calculations; 3) Fiscal impacts of new development; and 4) Recommendation. 1) OVERVIEW I have seen fiscal impact studies, but the computer generated results are only as good as the numbers entered by the consultant/engineer and herlhis assumptions. For example, let's say sewer and water through a major area of the city costs $IOM. Your attorney says he cannot defend special assessments to that level as the 30-inch pipes are larger than anyone subdivision needs. A typical study would then label the 30% - 40% oversizing costs as "general obligation" and, therefore, be bad for an existing resident. This could be true, but it could also be false. Is the bird in my hand dead or alive? The Upper Bluff Creek sewer and water project is exactly the hypothetical described above, i.e. total cost, size of pipes, sustainable assessments, etc. Was I, as a taxpayer, burdened with this $3-4M deficit? No! Connection charges were set to pay system charges on a community wide basis. Will the $3-4M be paid? Yes! Was the water tower on Murray Hill repainted (major expense removing old lead base paint) via the same fees? Yes! Would I have had to pay for this had new development not occurred? Yes! [Note: Murray Hill was developed long before "connection charges" were established, and, therefore, they had no monies to pay this cost if new development had not occurred.] All of the points made above are true in regards to other improvements; i.e. streets, parks, etc. For example, our attorneys/appraisers advised the city that we could not sustain assessments of more than 40% of the anticipated costs of building Kerber Boulevard. We built the road and assessed 40% of its costs to the abutting properties. Did "general obligation" pick up the remaining 60%? No! The City ofCbauhassm. A growing community with clean lakes, quality scbools, a channing downtown, thriving businesses. and beauliful parks. A greal place 10 Ii,,,, work, and play ·1 Mayor and City Council July 7, 1998 Page 2 As the project was partially within a TIF district, that district paid 40% of the total project costs. We additionally applied for and received state aid designation and the state paid 70% of the total project cost. Was collecting 50% more than a project cost the city legal? Yes. Is this scenario typical? No, but it was true of at least four projects that I am aware of and the 1997 audit report shows a healthy balance in the fund labeled "municipal state aid" even after it funded many years of "water quality projects" and suffered major damages during the "investment debacle." (Note: You need a few good projects to help those that stumble.] Another example could be the Steiner Development (41 & 5), CSM (Dell & 5), or Villages on the Pond (Market & 5). In each of these projects, we did or will assess ±90% of the project costs to the developer. The remaining 10% will come trom tax increment. Could we have charged 100% of the costs to tax increment and simultaneously assessed 90%? Yes. Would this be legal? Yes. Would we have paid the entire cost of the park referendum by doing such? Yes. City councils need to make decisions each day as to what is fair and right. I think the decisions we have made are fair and justified, but my point is there are a number of ways to ensure that new development does not occur at the expense of existing homeowners. The above overview was presented to reflect my dismay with a fiscal analysis that concentrates primarily on capital costs of new development. The comprehensive planning process should not be driven by fiscal considerations - those are within your hand to live or die. Our overriding principle should solely be- What do we want this community to be? Before presenting my "Fiscal Impacts of New Development," a review of existing property values and tax calculations is in order. Following the statistics are various "Hypotheticals" which can be fallacies to any "Fiscal Impact Analysis or Formula," including my own. 2) EXISTING TAX CALCULATIONS (All Operating and Debt Expenditures) Residential Value 0-$150,000 150,000-250,000 250,000+ No. of Homes 2,500 2,000 900 5,400 Average Value (I,OOO's) 130 200 300 Average Tax Capacity 1,600 3,000 5,300 Total Tax Capacity 3.8M 5.7M 4.5M 14.0M Other Tax Class Residential-Other Rural (Ag) C & I (Hennepin) C & I (Carver) l.OM .2M I.3M .5M 17.0M 1998 City Tax Levy - 4.67M City Tax Rate (4.67 + 17.0) = 27.404% Total Tax Rate (city, county, school, misc.) = 150%. Accordingly the city's 27.4% = 18% of your tax bill) Cost per household (4.67 + 5400) = $865 Cost per household factoring out services to "Other tax class" = $710 Mayor and City Council July 7,1998 Page 3 The City Council asked that tax increment revenues be included in this report. These revenues are as follows: District Tax Increment Collections TIF District #24, Arbor Business Park TIF District #25, Downtown TIF District #26, McGlynn TIF District #27, National Weather Service TIF District #28, Entertainment TIF District #29, North Bay Hennepin County District #3-1 Total 5,116 5,394,954 711,702 378,272 86,756 5,470 580,000 $6,931,176 Before I present my Fiscal Impact Model, various hypotheticals need to be presented. They are: Hypothetical Scenario #1 Assume that the growth that has occurred over the past 10-15 years had not occurred, but that our 5,400 total residential units still exist. We now become a Columbia Heights. With 5,400 units valued at less than $150,000 and a tax levy of$4.7M, our tax rate would be 50% or a whopping 85% increase. However, based on state aid formulas (under which we currently get $0), our hypothetical town would get $2.5M in state aids which would produce a net tax rate of 25%. What's the bottom line? The state has massaged state aids, homestead credit, fiscal disparity contributions/distributions, etc. to virtually guarantee (rich or poor) that any city's tax levy will be within 10% of our previous 25% level. [Note: Within two years, the formula will probably kick in to reduce our current levy of 27% (created by the park referendum) back to the average 25% level.] Hypothetical Scenario #2 Let's assume we all have newer houses and are all paying taxes at the higher rate for new homes ($150,000-$250,000). In that case, our tax rate would reduce to 20% or a 40% decrease. Another way of making this same point is that a new homeowner is now paying $5,000/year in property taxes to subsidize my taxes of$3,000/year. Any "formula" developed should recognize that the 4,090 units (vacant in 1991 MUSA) proposed to be built through a plan amendment will be burdened with a significantly higher percent of the tax bill than a home built today (then being 20 years old) or mine (then being 50 years old). Hypothetical Scenario #3 The proposed comprehensive plan maintains approximately the same number of commercial/industrial properties to residential as currently exists. As commercial/industrial ;'1 Mayor and City Council July 7, 1998 Page 4 property pays approximately 2-3 times more than residential property, a reduction in commercial/industrial acreage would be reasonably easy to calculate in terms of net tax difference. I will return to the start of this memorandum in terms of why we attempt to plan, i.e. to develop a community that is a community. If your definition of a well planned community is a "no tax community," then bring in three Koch Refineries and we can put this exercise to bed. 3) FISCAL IMPACTS OF NEW DEVELOPMENT [Note: The first line under the headings 2000, 2010 and 2020 uses constant dollars for our current cost per household ($710), times the number of additional units to derive a tax rate. That line treats the 1100 additional homes in 2000 or 3000 additional homes in 2010 as isolated communities in which only they existed. The "Blended Rate" line folds their values/taxes back into the community as a whole, i.e. the tax impact for a new home in 2020 assumes that 1100 additional homes were built between now and the end of2000 and that 3000 additional homes were built between 2000 and 2010.] No. of Add'l Average Average Tax Total Tax Costs of City Tax Capacity Rate Homes Value Capacity Capacity Services ($I,OOO's) ($710/home) Year 2000 1100 $275 $4,700 5.2M .78lM 18% Current Rate 27.4% Blended Rate 25.3% -2.1%(-8%) Year 2010 3000 $300 $5,300 l6.0M 2.13M 16.2% Blended Rate 21.7% -5.7% (-21%) 13.0% Year 2020 $325 $5,700 22.8M 2.8M 17.4% 4000 -10.0% (-36%) Tax Increment - The above analysis considers tax increment as tax neutral. Why? The fo1\owing analogy is not tota1\y correct, but the bottom line is. Think of a tax increment district as a typical subdivision. As the streets are built in that subdivision and normal services extended (plowing, fire, police, etc.), the city receives the same 18% of the tax do1\ar trom that parcel as we receive trom you or 1. Tax increment districts are no different. Instant Web, Rosemount, etc. are paying 18% of their tax do1\ar towards operating the city. The difference is that the remaining 82% of CSM or the DataServ's taxes can be used at the discretion of the council, i.e. tax incentives to businesses, paying oversizing costs (discussed earlier), building a water tower benefiting far more than that subdivision (TI District), etc. In the above example, the losers of the 82% of the Mayor and City Council July 7,1998 Page 5 tax dollar are Hennepin County and the State of Minnesota (technically the Eden Prairie school district), [but whatever tax they would have received from CSM will be reduced from their state aids. Therefore, they do not care if we create a district or not.] Ifthe council has discretion in setting the amount of tax increment to be used to offset operating costs, why not set it at 36% and therefore reduce everybody's taxes? The answer is simple. You have just lit the fuse of a major time bomb; i.e. our largest district has operating expenditures of$7l8, 918. These expenses include street lighting, signals, maintenance, police, fire, etc. Assuming the district ceased today, our normal 18% of the tax dollar from these same parcels would produce $702,000 in tax dollars or a loss of approximately -$16,918. If the city would have set operating expenditures for this district at 1.5M, in 2003 we would be faced with firing every other employee associated with this district, answering lout of 2 fire/police calls, etc. The minor difference between operating revenues and expenditures for this district will be corrected before 2004, but the bottom line is that this district, and all others, are "tax impact neutraL" 4) RECOMMENDATION We should move ahead with the comprehensive planning process. As parcels come before us where the use is proposed to be changed to something having a detrimental tax impact, we should do what we did with the Town and Country Homes property - challenge the applicant to show where other parcels can make-up for the loss. This planning strategy has worked in the past and it will work in the future. - C .. E >- o is. E W " C .. .. " ·û Õ c.<:: = 3! 0= (JOG) CJ:... .m ¿-d: ~oQ. o-oct Co" e'S _Co "0 :;¡CL - o .. - .. .. 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