Minnesota Lawyer
Gary Carlson, director of intergovernmental relations for the League of Minnesota Cities , says he has received several inquiries from city officials about the wording and meaning of the levy limit. (Staff photo: Peter Bartz-Gallagher)
Double-counting of debt payments negates limit
As local governments prepare to submit their preliminary property tax levies to the state, there is confusion in some communities about the specifics of the levy limit that state lawmakers passed in this year’s omnibus tax bill.
As part of the tax bill passed by the DFL-controlled Legislature and signed by Gov. Mark Dayton, 2014 property tax levy increases are limited to 3 percent. The limit was put in place as a check on local government spending in light of increased state funding for schools, cities and counties.
Press accounts in recent days have quoted local officials who are calling attention to an apparent mistake in the way the levy limit was drafted that could significantly affect how the limit applies to their budgets.
Levy limits apply to the part of a local unit of government’s budget that pays for general operations. There are also special levies that aren’t subjected to the levy limit. For example, lawmakers don’t limit levies that are used to pay off debt. The reasoning is that such a limit could remove the flexibility a city needs to make its debt payments, said Gary Carlson, director of intergovernmental relations for the League of Minnesota Cities (LMC).
“The Legislature has never wanted to jeopardize the ability of a city to pay debt,” Carlson said. “Nor do they want to have a city have to issue a revised notice to bond holders that they really don’t have the full faith and credit of the city behind us because the Legislature has limited us.”
The levy limit put in place in the tax bill can’t be less than the amount that was levied in the previous year. That calculation includes both the previous year’s amount of operating and debt levies. In other words, a city that had a $6 million operating budget and $5 million debt service budget would calculate the total amount for purposes of the levy limit rather than just the $6 million operating levy. And since the limit for 2014 doesn’t apply to debt levies, the result is they are double-counted.
“It’s double-counted in the sense that if their levy is their 2013 total certified levy, that includes their 2013 special levies, then they get to add on top of that their 2014 special levies, next year’s debt service,” Carlson said.
Cities with sizeable debt levies would have to spend a lot of money before hitting the limit. The Fargo Forum quoted the city of Moorhead’s Finance Director as saying that reaching the state-imposed levy would amount to a “ridiculous” amount of spending.
Carlson said he has received several inquiries from city officials about the wording and meaning of the levy limit. It’s a matter of some urgency, because local officials are in the process of crafting their 2014 budgets. They need to certify their proposed levies by Sept. 16. That’s an important step en route to the Dec. 10 deadline for the state Department of Revenue to certify the budgets.
“The important point about September 16,” Carlson said, “is that whatever the levy that the city or county certifies as their proposed levy, that number becomes essentially a maximum amount they can levy for 2014, because the law specifically prohibits cities from increasing their levy except for very limited things – like a natural disaster that occurs after the preliminary levy was certified, or a bond issue that was approved by the voters after the preliminary levy was set.”
Mistake introduced in conference committee
During the 2013 legislative session, the levy limits were a late inclusion in the omnibus tax bill, with neither the House nor Senate tax bills containing limits heading into conference committee.
The provision was put forward when Senate Majority Leader Tom Bakk tasked Senate Taxes Chairman Rod Skoe to work out levy limit language with city lobbying organizations like LMC and the Coalition of Greater Minnesota Cities.
Bakk noted that levy limits have been commonly used in the last couple of decades and were appropriate in light of increased funding to schools and local units of government.
“From a policy standpoint, we thought we were putting a lot of money into K-12 to help hold down voter-approved levies,” Bakk said. “[We passed] a lot of money to cities, counties and townships. It seemed like a reasonable request of cities to not use that as an opportunity to double dip both from the state and the property tax payer.
“To their credit they did. They responded accordingly, and around the state I think you see a lot of cities with flat levies.”
In the budget that was signed by Dayton, school districts were authorized to increase their levies by $300 per pupil without a referendum. It also increased aid to cities and counties and exempted local governments from paying the sales tax.
The bill-drafting problem seems to present the potential for local governments to jack up spending. But Carlson said that possibility is undercut by the fact that city budgets are subjected to a significant amount of scrutiny before they are enacted because of the Truth in Taxation law.
“There is always taxpayer vigilance behind this whole process,” Carlson said. “Minnesota is one of the few states that runs the property tax system twice. Once [in the Truth in Taxation hearings] to highlight for taxpayers what’s going on. I honestly can’t see a city making a decision flippantly that it’s going to raise taxes. They know there are a lot of steps in the process, and a lot of taxpayer oversight.”
