Financial Model for Land Use Tax Base
CITY OF
CHANHASSEN
8~
--
MEMORANDUM
TO:
Mayor and City Council
Don Ashworth, City Manager
JO Ci0' Center Drive, PO Box 147 FROM:
Chililhaiiff/, Minnesotil55317
Phone612.937.1900 DATE:
CCIlfl'tzl Fax 612.937.5739
r:ilgiileering Filx 612.937.9152
)1Ib1ic Stif('Zl' Fax 612.934.2524
\\;.u li'I1'/{'.ci.chililhilSSClI.11li/.liS
July 10, 1998
SUBJ:
Fiscal Impact Statistics/Comments
This memorandum has four components:
1) Overview
2) Tax statistics by tax class (if your interested in developing your own
formula including potential traps [Hypothetical 1-2])
3) Summary
4) Recommendation
OVERVIEW
I have seen fiscal impact studies (some by consultants we have used and respect),
but the computer generated results are only as good as the numbers entered by the
engineer and herlhis assumptions. For example, let's say sewer and water through
a major area of the city costs $1 OM. 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% oversizing costs as "general
obligation." This could be true. Is the bird in my hand dead or alive?
The Upper Bluff Creek sanitary sewer project is exactly the hypothetical described
above, i.e. total cost, sustainable oversizing, assessments, etc. Was I, as a
taxpayer, burdened with this $3M deficit? No! Connection charges were set to
pay system charges on a community wide basis. Will the $3M 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!
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!
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
'f City of Ow/basseI/. A gr01l'ing COllllillf/lity with CICilil l,dces, qu,di(l'schoofs, il chllnning dOl/illtollln, thrh'ing businesses, ilnd uCil/ltifl/1 Pllrks. A greilt plllre to lil'i', /l'ork, ilnd plizr
Mayor and City Council
July 10, 1998
Page 2
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 1996 audit report showed 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.]
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?
The remainder of this memorandum attempts to look at operating costs associated with new
development.
Calculation of Operating Costs
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)
120
200
300
Average Tax
Capacity
1,600
3,000
5,300
Total Tax
Capacity
4.0M
6.0M
4.8M
14.8M
Other Tax Class
Residential-Other
Rural (Ag)
C & I (Hennepin)
C & I (Carver)
Personal Property
I.OM
.2M
13M
.5M
.5M
183M
1998 City Tax Levy - 5.0M
City Tax Rate (5.0 + 18.3) - 28%
Tax Increment - Future Impacts
Net tax capacity*
Future taxes generated @ 28%
Current direct and indirect charges
Net tax less than district leases
$ 2.5M
$702,000
$718.918
-16,918
*Total tax capacity of $4.3M reduces to $2.5M after fiscal disparity contribution/distribution
Mayor and City Council
July 10, 1998
Page 3
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$5.0M, 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 28% (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
the 4,090 units 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 amount of
commercial/industrial properties to residential as currently exists. As commercial/industrial
property pays approximately three times more than residential property, a reduction in
commerciallindustrial 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 ofa well planned community is a
"no tax community," then bring in three Koch Refineries and we can put this exercise to bed.
Summary
It is obvious that no "formula" is being presented--only facts and observations. My primary point
in preparing this "fact list" is to partially show that any "formula" finally adopted will have more
holes in it than substance.
f
l
Mayor and City Council
July 10, 1998
Page 4
Recommendation
We should move ahead with the comprehensive plan 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 Autumn Ridge 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.
g:\mgr\taxformula I.doc