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Memo - 2012 Budget - Draft of Public Hearing PresentationCITY OF HOPKINS FINANCE DEPARTMENT MEMORANDUM Date: November 22, 2011 To: Mayor & City Council From: Christine Harkess, Finance Director Subject: 2012 Budget - Draft of Public Hearing Presentation Attached is the information we will be presenting at the Dec 6`h budget public hearing. Additional work was put into the budget that allowed us to lower the levy from 2.07% to 1.11 % a 0.96% decrease. The General Fund budget has also decreased going from 2.14% to 1.66%. The details of how we got there will be discussed at the meeting. In addition the preliminary power point for that meeting is attached. Please review and offer comments. I'm always looking for ways to make the information understandable by the general public. Finally, I've attached two documents on the market value homestead exclusion. Think about which the public may find more informative and that is the one we'll use. We can of course include both. Public Hearing for the 2012 Levy and Budget December 6, 2011 Taxation Process • Preliminary Levy was set in September • Proposed tax notices mailed • Public hearing for final proposed levy and general fund budget. • Final adoption of budget and levy • December 201h council meeting. Purpose of Budget Hearing • To discuss the City's budget • To discuss how the city budget impacts the city portion of your taxes • The focus of the hearing is on the budget and levy, not property valuations • Property valuation discussions are held each spring (our City and County Pro Tax Shift TNN $12,000 Pr ,d L 6udaN $10,000 a.ua.aor•n M,rka Valua N N,mPropMy w� R�m�� $8,000 State M,ndatad Cl,u R,tac ❑zoos ey TN,1 R.,Gp,.ay" 02007 $6,000 --- o2 08 ■ 2000 $4,000 - ■20110 ■28112 $2,000 1 $0 - Residential Comm/Indus Apartments Tax Capacity Values Purpose of Budget Hearing • To discuss the City's budget • To discuss how the city budget impacts the city portion of your taxes • The focus of the hearing is on the budget and levy, not property valuations • Property valuation discussions are held each spring (our City and County Pro Taxes Are Determined TNN Pr ,d L 6udaN a.ua.aor•n M,rka Valua N N,mPropMy w� R�m�� State M,ndatad Cl,u R,tac PfOP"ba` awla.d . W.d.d ey TN,1 R.,Gp,.ay" a,.amaoo.aoo . __ AW. OW - a,.am.mo.am a,.mo== seoamo.000 aemm , m s+oamo.am atm OMMO ao Pro .dy T„ R.l. Market Values a- �---• -^-•— - qa 2001 11006 2a0a 2m7 'Oa0 2019 2a�0 20.E 525.000.000 $20900.000 915.000.000 910.000.000 MOW= Tax Capacity Comparison 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 +PuiE " - Aprlmmt -U .0M +-Tdd Fiscal Disparities • Spreads commercial growth among all metro cities and benefits cities that are not experiencing commercial growth • Hopkins had been a net "gainer" — we received more than we contributed • Hopkins is now a net "contributor" — meaning we contribute more that we receive • Results in higher tax rate RESIDENTIAL PROPERTIES TAX CHANGES FROM 2011 Iwmewrnvs 20A91 .,, 0% 11.9% o19YN _ Mn,x.eleet •10.0% � •20%nW evn 1391%01 tWMI/Illttt •90% 99% le 55%W S2%M Oacreau Smart Growth and Development • LA Fitness • Excelsior Crossing Phase III • Hopkins Health & Wellness Center Expansion • Marketplace & Main Apartments • Pizza Luce Fiscal Disparities Changes • Changes in the Fiscal Disparities Program affects the tax rate for Hopkins properties. Net Year Contribution Distribution Gain/ Loss 2012 3,092,328 2,650,437 (441,891) 2011 3,324,078 2,645,025 (679,053) 2010 2,858,921 2,913,208 54,287 2009 2,766,202 2,840,070 73,868 2008 2,450,063 2,405,483 (44,580) 2007 2,116,466 1,997,455 (119,011) 2006 1,952,996 1,836,753 (116,243) 2005 1,526,509 1,673,106 146,597 2012 Proposed Tax Levy G—.1 O,,d Gaprtel Levy00 $ e, S B. 1.- 5 121 5 S. S f e. S B, 35.W0 35. i e,9o%09t 35. PEPA Levya M S-1 8pe4e1 L.1 -ONer MMLaNec p03HRA 9 B.- Rarenue Bwds f 2WI3W f S AO2B GOImpmv RewlNn9 Bantle -0A GO --- B.-100,17111 Sutlorel —d. 1.1 $ 1, f 1,305,400 114 S I,MS eubronl Speuel LeNea TOT.LL LEVIES S t, f 1,341.800 310,1x,414 ft0,348,3m S 1.341.900 910,250. Inoses ov.r prior Yeer 3 212,]29 $ m,914 $ 112.572 Germ 9 ncr lOeul-Total 2.141 2.02 1.11% 2 Tax Levy Changes General Levy Increase $245,027 Capital Levy 25,000 Special Levy Decrease (222,850) (For MVHC unallotment) Property Taxes Debt Levy Increase 65,400 Total Levy Change $112,577 Revenue Budget General Fund — Sources of Revenue :ro• ea. � I sos u. aon lPa �a roa i o�ioos row mos mos xmo :aw too9 :o:o :a, m., 2012 Proposed General Fund Budget and Levy General Fund Budget $10,470,526 This is an increase from the 2011 budget of 1.66%. Tax Levy $10,250,991 This is an increase over the current year's levy of $112,577 or 1.11 % and a.96% decrease from the preliminary certified levy. General Fund Revenues Chagas lar Misrnllarreous Expenditure Budget 2011 2012 % General Fund Budget Budget Incrl(Decr) Property Taxes $ 8,630,564 $ 8,887,591 2.98% Intergovemmental Rewnue 442,070 512,370 15.90% Licenses, Permits & Fees 544,790 487,115 -10.59% Charges for SeMce 161,200 245,150 52.08% Miscellaneous Reenue 314,900 313,300 -0.51% Interest Earnings 75,000 25,000 -66.67% Use of 2009 Saungs 130,803 - 0.00% Total Revenues $ 10,299,327 $ 10,470,526 109,970 General Fund — Sources of Revenue :ro• ea. � I sos u. aon lPa �a roa i o�ioos row mos mos xmo :aw too9 :o:o :a, m., 2012 Proposed General Fund Budget and Levy General Fund Budget $10,470,526 This is an increase from the 2011 budget of 1.66%. Tax Levy $10,250,991 This is an increase over the current year's levy of $112,577 or 1.11 % and a.96% decrease from the preliminary certified levy. General Fund Revenues Chagas lar Misrnllarreous Expenditure Budget 3 2011 2012 Budget % General Fund Budget Budget Incr1(Decr) City Council $ 71,547 $ 68,697 -3.98% Administratile Services 451,670 469,132 3.87% Finance 203,243 209,726 3.19% Legal 135,000 135,000 0.00% Municipal Building 294,818 296,863 0.69% Receptionist 44,172 44,846 1.53% Assessirg 167,236 173,091 3.50% City Clerk 99,415 109,970 10.02% Inspections 616,607 613,167 -0.56% Police 4,484,387 4,530,032 1.02% Fire 838,258 855,424 2.05% Public Works 2,174,400 2,198,677 1.12% Recreation 199,721 205,099 2.69% Acti,Aty Center 333,471 323,765 -2.91% Planning & Zoning 125,182 126,837 1.32% Other Financing Uses 60,200 110,200 83.06% Total Expenditures $ 10,299,327 $ 10,470,526 1.66 3 GF Expenditures Other General Recreation 1% Government 5% 11% CommuMty S—ic. Public woks 10% nx Puh` Satety 52% General Fund Budget Expenditure Solutions Over Last Two Years • Debt Savings/Refinancing • Delayed hiring of vacant positions r Eliminated non-critical capital items a "Every little bit adds up" — small cuts across all city departments Grants — Police (cont) *Met Life — Community Police Partnership *COPS Grant 2008-2010 *COPS Grant 2011-2015 *Hopkins Crime Prevention Fund - rifles General Fund Budget Three Year Comparison Year Budget Incr/Decr % Change 2010 $ 10,073,003 $ (2,489) 0.02% 2011 $ 10,299,327 $ 226,324 2.25% 2012 $ 10,519,463 $ 220,136 2.14% Change over three year period = 4.43% Average change over three years is approximately 1.48% per year The rate of inflation from 2010 to 2011 was 3.8% Grants - Police *Bullet Proof Vests *Operation Nitecap ♦Glen Lake Optimists — school patrol and project alert *ISD 270 — One Voice Grant *SAFR Grant Grants - Fire *HazMat Grants *Firefighters Assistance Prevention *MN Resuscitation Consortium *MBFTE Training *CERT Grants — State and private !I Grants — Public Works #9 Mile Creek — anti -icing machine *Federal ARRA — boiler grant Grants — Econ Devel. (cont.) +� Hennepin Co. — TOD Grant MRAC — Art Street Grocery Market Study Grant Grants — Depot Coffee House {*General Mills Foundation *Park Nicollet Foundation *McKnight Foundation *Hennepin Co. —Recycling Grant * M RAC *Hennepin Co. — Waste Abatement *DNR — Solar Grant * Individual Donations Grants — Economic Devel. *DEED Grant — LA Fitness *DEED Grant — Town & Country *DEED Grant — Opus *Met Council — Opus *Hennepin Co. —Active Living *Hennepin Co. — Blake Road Sidewalks Grants - Recreation *Park Bench donations #NYHA Donation *Hennepin Co. Youth Sports Grant *State Legacy Funds — Shady Oak Beach Play Area Grants — Art Center #MSAB Grant (2) *Friends of the Hopkins Center for the Arts Corporate and Individual sponsorships 5 Innovation *Partnerships • Hopkins School District • Hennepin County • Neighboring Cities • Three Rivers Park District • Watershed Districts, etc. Budget Challenges • Loss of significant revenue sources • Inspection revenues • Decline in investment income • Health care costs • Change in Homestead Credit Program • PERA rate increase — state mandated • Inflation • Energy costs Fuel & fuel related projects • Property & liability insurance Looking Ahead 2012-2013 • Look for additional savings & efficiencies • Evaluate programs • Evaluate services • Evaluate projects • Continue to search for grant opportunities Savings & Efficiencies *Go Green • Implemented police vehicle fuel monitoring system to save on fuel costs • Building and Facility Changes have saved over $15,000 annually • Organics recycling • Scanning of documents to digital storage • Paperless Packets • LED Lighting Improvements Long -Range Planning • Capital Improvement Plan • Equipment Replacement Plan Both are 20 year plans for major expenditures • Focus is on next 5 years • Allows us to plan for funding of major projects and equipment purchases Analysis of Average Valued Home • 2012 Home Valued at = $225,000 • Assuming constant market value •2011 City Taxes $1,252 • 2012 Proposed City Taxes $1,334 . Increase of $82 from 2011 • 2012 Revised City Taxes $1,319 . Decrease of $15 from preliminary levy M TAX HISTORY CO HOMESTEAD ERESIDENTIAL,000 H� WITH A CONSTANT VALUE OF 8425,000 $1,900 31.1900 51 3DO $1 100 8800 2005 2008 2007 2008 3009 20t0 2(111 2013 Property Tax Breakdown on Home Valued at $225,000 City $1,334 *County $1,097 *School District $ 657 *Special $76,000 $150,000 — - $450,000 Previous Law: MVHC - --- - - 5700 Net Tax Capacity (market ,slue x 1%class rate) $760 MVHC vs MVHE Sample Home Values $76,000 $150,000 $300,000 $450,000 Previous Law: MVHC Net Tax Capacity (market ,slue x 1%class rate) $760 $1,500 $3,000 $4,500 Gross Tax at rate of 1.05.81% $804.16 $1,587.15 $3,174.30 $4,761.45 Current MVHC $304.00 $237.40 $102.40 $0.00 Net Tax -gross tax less MVHC $500.16 $1,349.75 $3,071.90 $4,761.45 New Law: Exclusion Market Value Exclusion $30,400 $23,740 $10,240 $0 MV after exclusion $45,600 $126,260 $289,760 $450,000 Home Net Tax (market ,alus x ,%oleos rate) $456 $1,263 $2,898 $4,500 MVHC $0 $0 $0 $0 Net To. at rate of 110.92% $505.80 $1,400.48 $3,214,02 $4,991.40 Value for Taxes • 24 -Hour Police and Fire Protection • Emergency medical treatment and management services • Well Maintained Streets, Trails, and Sidewalks Refuse and Recycling Services • Elections + Boulevard Tree and Forestry Program • High Quality Recreation programs • Hopkins Activity Center and Hopkins Depot • Hopkins Center for the Arts • Community and Economic Development • Housing Services and Programs • Building Inspections, Licensing, and Code Enforcement • Beautiful Parks and Open Space Districts 272 Total Taxes $3,360 This does not include referendum market value taxes levied by the school district(s) or reduction for the market value homestead exclusion which is new for 2012. Where My Taxes Go Special Ta><inp Districts 8% School 194''- City Public Hearing for the 2012 Levy and Budget Questions? G Purpose General Operations General Fund Capital Levy Special Levies: PERA Levy MVHC Levy Subtotal Special Levies - Other Debt Levies: 2001 GO Refunding Bonds - Park & Rec 2002B GO Improv Revolving Bonds 2003 HRA Revenue Bonds 2007B GO Improv Revolving Bonds 2007 Capital Improvement Bonds 2010A GO Improvement Bonds 2010B Refunding Bonds Subtotal - Debt Levies Subtotal Special Levies TOTAL LEVIES Increase over prior year Percentage Incr (Decr) - Total CITY OF HOPKINS 2012 PROPOSED TAX LEVY 2012 Net Levy 2010 2011 Proposed $ 8,384,010 $ 8,539,064 $ 8,881,428 - 100,000 $ 125,000 $ 8,384,010 $ 8,639,064 $ 9,006,428 35,500 35,500 35,500 239,175 222,850 - $ 274,675 $ 258,350 $ 35,500 108,000 - - 59,000 59,000 - 200,000 200,000 220,000 185,000 172,000 184,500 715,000 710,000 765,900 - 100,000 77,000 - - 59,000 $ 1,267,000 $ 1,241,000 $ 1,306,400 2012 Net Levy Revised $ 8,784,091 $ 125,000 $ 8,909,091 35,500 $ 35,500 220,000 184,500 765,900 77,000 59,000 $ 1,306,400 $ 1,541,675 $ 1,499,350 $ 1,341,900 $ 1,341,900 $ 9,925,685 $10,138,414 $ 10,348,328 $10,250,991 $ 372,571 $ 212,729 $ 209,914 $ 112,577 3.90% 2.14% 2.07% 1.11 Tax Capacity Rate 48.999% 55.739% CITY OF HOPKINS PROPOSED GENERAL FUND REVENUE BUDGET Licenses, Permits & Fees 2011 2012 % % Department Budget Budget Incrl(Decr) of total Property Taxes & PERA Special Levy 8,630,5641 8,887,591 1 2.98% 84.88% Intergovernmental Revenue Administrative Citations 6,000 8,000 33.33% PERA Aid 20,510 20,510 0.00% Fire Licenses & Permits MVHC unallotment 3,500 0 PW - Licenses & Permits 9,490 Police - Federal Grant 0 0 2,500 1,000 Police - State Aid 177,700 177,000 -0.39% -10.59% 4.65% Police - POST Reimbursement 10,000 9,000 -10.00% Total Charges for Service Police - Misc Grants 4,000 86,000 2050.00% 2.99% Police - 911 Service Fee 24,860 24,860 0.00% 0.24% Fire - State Aid 85,000 70,000 -17.65% 0.00% Fire - County 0 0 1.66% 100.00% PW - State Aid 120,000 125,000 4.17% Total Intergovernmental Revenue 442,070 512,370 15.90% 4.89% Licenses, Permits & Fees Court Fines 135,000 115,000 -14.81% Building Permit & Inspection Fees 283,100 246,500 -12.93% Business Licenses 7,500 5,000 -33.33% Administrative Citations 6,000 8,000 33.33% Liquor, Animal Licenses & Penalties 95,900 98,700 2.92% Fire Licenses & Permits 5,300 3,500 -33.96% PW - Licenses & Permits 9,490 9,415 -0.79% P&Z - License & Permits 2,500 1,000 -60.00% Total Licenses Permits & Fines 544,790 487,115 -10.59% 4.65% Charges for Service Finance Department 5,200 5,750 10.58% Municipal Building 2,500 2,500 0.00% Assessing 1,000 1,200 20.00% City Clerk 11,100 0 -100.00% Inspections 43,450 71,950 65.59% Police 43,500 40,000 -8.05% Fire 6,200 70,000 1029.03% Public Works 2,250 2,750 22.22% Activity Center 46,000 49,500 7.61% Planning & Zoning 0 1,500 -20.59% Total Charges for Service 161,200 245,150 52.08% 2.34% Miscellaneous Revenue Franchise Fees 290,000 290,000 0.00% Unallocated Misc 500 0 -100.00% Finance Department 4,800 4,800 0.00% Elections 0 0 Police 500 1,000 100.00% Fire 0 0 Public Works 2,100 4,000 90.48% Acitivty Center 17,000 13,500 -20.59% Total Miscellaneous Revenue 314,900 313,300 -0.51% 2.99% Interest Earnings 75,000 25,000 -66.67% 0.24% Use of 2009 Budget Savings 130,803 0.00% Total Revenues $10,299,327 $10,470,526 1.66% 100.00% CITY OF HOPKINS PROPOSED GENERAL FUND EXPENDITURE BUDGET 2011 2012 Budget % Department Budget Budget Incr/(Decr) FC-ity Council 71,547 68,697 -3.98% Administrative Services Administration 167,300 171,090 2.27% Personnel 43,924 44,405 1.10% Wellness 2,000 2,000 0.00% Information Services 238,446 251,637 5.53% Total Administrative Services 451,670 469,132 3.87% Finance 19,360 16,822 -13.11% Budget 23,066 26,249 13.80% Debt Management 0 0 21.21% General Accounting 129,448 133,402 3.05% Payroll 46,729 45,075 -3.54% TIF Administration 0 0 -95.02% Utility Billing 4,000 5,000 25.00% Total Finance 203,243 1 209,726 1 3.19% Legal 135 000135,000 613,167 1 0.00% Munici al Building 294,818 296,863 0.69% Rece tionist 44,172 44,846 1.53% lAssessing 167,236 173,091 3.50% City Clerk City Clerk 19,360 16,822 -13.11% Records Management 29,833 32,273 8.18% Elections 50,222 60,875 —10-9—,9-70-1 21.21% Total City Clerk 99,415 91,358 10.62% Inspections Building Code Inspections 252,170 268,598 6.51% Fire Inspections 38,205 34,494 -9.71% Heating & Plumbing Inspections 90,400 91,358 1.06% Housing Inspections 134,680 135,597 0.68% Restaurant& Hotel Inspections 23,309 1,160 -95.02% Misc. Community Inspections 75,143 79,260 5.48% Vacant Property Management 2,700 2,700 0.00% Total Inspections 616,607 613,167 1 -0.56% Police Police Administration 480,615 486,499 1.22% Patrol 2,360,705 2,466,299 4.47% Heat Team 73,298 58,906 -19.63% Reserves 33,620 24,467 -27.22% Investigations 499,148 430,357 -13.78% Metro Drug Task Force 105,737 105,292 -0.42% Pawn Shop 3,436 3,493 1.66% Outreach 80,804 84,036 4.00% Fire Fire 833,587 851,559 2.16% Emergency Preparedness 4,671 3,865 -17.26% Total Fire 838,258 855,424 2.05% Public Works 2011 2012 Budget % Department Budget Budget Incr/(Decr) Dispatch 526,782 553,145 5.00% Reception -Records 255,560 252,356 -1.25% Systems Management 64,682 65,182 0.77% Total Police 4,484,387 4,530,032 1.02% Fire Fire 833,587 851,559 2.16% Emergency Preparedness 4,671 3,865 -17.26% Total Fire 838,258 855,424 2.05% Public Works PW Building 33,692 32,739 -2.83% Equipment Services 78,446 86,229 9.92% Administration 26,478 27,442 3.64% Engineering 137,802 132,267 -4.02% Street & Alleys 853,812 859,205 0.63% Snow & Ice Removal 205,615 197,550 -3.92% Parks 628,101 652,465 3.88% Tree Service 210,454 210,780 0.15% Total Public Works 2,174,400 2,198,677 1.12% Recreation Playground 20,198 21,034 4.14% Ice Rink 12,284 12,192 -0.75% Park Service 12,518 12,810 2.33% Joint Recreation 147,000 152,000 3.40% Skate Park 7,721 7,063 -8.52% Total Recreation 199,721 205,099 2.69% Activity Center Act Ctr - Community Use 274,008 264,914 -3.32% Act Ctr - Maintenance 59,463 58,851 -1.03% Total Activity Center 333,471 323,765 -2.91% Planning & Zoning 125,182 126,837 1.32% Tuition Reimbursement 10,200 10,200 0.00% lContingency 50,000 1 90,000 1 80.00% Total Expenditures 10,299,327 1 10,460,526 1.57% Other Financing Uses Transfers to other funds 0 10,000 Total Other Financing Uses 0 1 10,000 Grand Total Expenditures $10,299,327 $10,470,526 1.66% Total Revenues $10,299,327 $10,470,526 Revenues Over (Under) Expenditures $ - $ q ® LEAGUE of CONNECTING & INNOVATING MINNESOTA SINCE 1913 CITIES Market Value Exclusion 101 October 2011 The Market Value Exclusion (MVE) program (hereafter referred to as "the exclusion") replaced the Market Value Homestead Credit (MVHC) program for taxes payable in 2012 and beyond. This guide describes how the exclusion works and highlights some of the issues that cities should keep in mind when examining the effects of the new program on their communities. Many of the issues relate to the ways that different aspects of the property tax system interact. A detailed description of the overall property tax system can be found in the "Property Taxation 101" guide. An overview of the new exclusion program and will be available on the League's site. Background During the 2011 special session, legislators eliminated the MVHC program, creating a savings of more than $260 million for the state budget. Cities had experienced years of cuts to the reimbursement payments from the state, leaving them with shortfalls in their property tax levies at the end of the year. The table below shows the amount cities expected to receive in reimbursement and the actual amount paid by the state for each year of the program (2002 through 2011). The state fully reimbursed cities for the amount of credit going to homeowners in only two years since the program's inception (2002 and 2007). The elimination of the program means that cities will no longer have to deal with the unpredictability and in consistency of reimbursement payment amounts. The new exclusion program, however, has created a lot of questions for local officials and property owners. The exclusion program begins with taxes payable in 2012. Year Original Amount (cities) Final Amount (cities) 2002 87,512,765 87,512,765 2003 85,539,919 65,425,091 2004 85,290,722 66,279,257 2005 82,636,505 65,087,094 2006 78,921,393 62,809,103 2007 75,935,548 75,935,548 2008 75,810,435 63,310,311 2009 76,770,261 57,204,103 2010 82,053,176 12,106,217 2011 est. 1 60,246,987 12,148,508 145 UNIVERSITY AVE. WEST PHONE: (651) 281-1200 FAx. (651) 281-1299 ST. PAUL, MN 55103-2044 TOLL FREE: (800) 925-1122 WEB: WWW.LMC.ORG How it works for homeowners: Much like in the MVHC program, homeowners will not have to take any action in order to benefit from the market value exclusion. It is applied automatically. The maximum exclusion will go to homes valued at $76,000 or less. The exclusion at that level is 40% of market value. For a $76,000 home, that means $30,400 of value is not taxable. In other words, all property taxes are applied only to the remaining $45,600 of market value. As home value increases, the portion of market value eligible for exclusion phases out and is at zero percent for homes valued at more than $413,778. Note that market values are determined in the year prior to the year in which taxes are paid. For example, values used to calculate taxes payable in 2011 were set in early 2010. Property owners will receive notices stating the value of their property for 2012 taxes early in the spring of 2012. That will be the first time that homestead owners see the amount of their value excluded. Below is a sample calculation of total taxes due (city, county, and school district taxes) before and after the exclusion from the Department of Revenue: Sample Home Market Value $76,000 $150,000 $300,000 $450,000 Previous Law: MVHC Net Tax Capacity (market value x 1% class rate $760 $1,500 $3,000 $4,500 Gross Tax at rate of 105.81% (rate x tax capacity) $804.16 $1,587.15 $3,174.30 $4,761.45 Current MVHC $304.00 $237.40 $102.40 $0 Net Tax total tax less credit $500.16 $1,349.75 $3,071.90 $4,761.45 New Law: Exclusion Market Value Exclusion $30,400 $23,740 $10,240 $0 MV after exclusion $45,600 $126,260 $289,760 $450,000 Home Net Tax Capacity (market value x 1% class rate) $456 $1,263 $2,898 $4,500 MVHC Credit $0 $0 $0 $0 Net Tax at rate of 110.92% rate x tax capacity) $505.80 $1,400.48 $3,214.02 $4,991.40 *the total tax rates used in this example are statewide averages before and after the effects of the exclusion What it means for cities The immediate effect of the exclusion is a decrease in the tax base. The valuations used for calculating taxes owed in 2012 were set in early 2011. They won't be updated until early 2012 for taxes payable in 2013. So, a portion of homestead value will be excluded and values for other kinds of property will not be updated. The extent of the decrease in tax base depends on the portion of homestead property each city has. The tax base decrease will mean that in order to generate the same amount of city property tax dollars as in 2011, city tax rates will have to go up. For example, if prior to the conversion a city's tax base was 1000 and its tax levy was 100, the tax rate would be 10%. Now, in that same city the tax base has been reduced 40% to 600. The city still needs to generate 100 in property taxes. The rate climbs to almost 17%. For many cities, it will likely be very difficult to hold levies flat given the repeated cuts to Local Government Aid (LGA) payments and to ongoing cost pressures, like the cost of healthcare, fuel and infrastructure maintenance. The exclusion will result in a shift in tax burden from homestead properties to other kinds of property. The extent of this shift will be influenced by the portion of all homestead property made up of lower value homes. The more lower -value homes a city has as a portion of its tax base means more tax burden shifting. In many communities, lower value homes will pay more in taxes even if the levy remains flat. This is because of the increase in tax rate necessary to generate the same amount of tax levy. This effect is more likely in cities where a high portion of property is lower value homes. Property tax bills, of course, reflect the levy decisions and tax bases of not just the city, but also the county, the school district and any special districts. The tax bases of all local governments will be affected by the new exclusion program. A given city may not see a big decrease in its city tax base and therefore experience little shifting of city tax burden. The county containing that city may have a lot of lower -value homes and therefore experience a big tax base loss. That will affect property owners within the city. Other issues to consider The new HMVE program will interact with other aspects of the tax system, namely Tax Increment Financing (TIF), Local Government Aid (LGA), and market value levy limits. The interactions are described briefly below: MVE and TIF: The new program will mean that current values of TIF properties will be adjusted but the Dept. of Revenue has indicated that the base year values will NOT be adjusted. This will result in a decrease in the increment captured and may cause problems for cities in paying off debt associated with the TIF district. MVE and LGA: The current LGA formula takes city tax base into account in distributing the LGA appropriation. The exclusion will reduce tax capacity in each city. That will mean a reduction in the capacity side of the need vs. capacity comparison the formula makes. WE and market value levy limits: The Dept. of Revenue has indicated that market values for determining HRA and EDA levy limits and certain debt limits will be the values after the effects of the exclusion. Resources League of Minnesota Cities http://www.Ime. org/yage/ 1 /property -tax -state -funding -fiscal -issues. i sp MINNESOTA• REVENUE Understanding Recent Changes in Homestead Benefits For Property Tax Purposes What Changed? The 2011 Legislature repealed the Homestead Market Value Credit, (the homestead credit), and replaced it with a new Homestead Market Value Exclusion. The last year of the credit is for property taxes paid in 2011 and the exclusion begins for property taxes payable in 2012. What is a credit? What is an exclusion? A credit is a reduction in the An exclusion is a reduction in the amount of taxes due. amount of value subject to tax. The old law with the credit was as simple as: X — Y = Z If your initial tax was X, and your credit was Y, then the tax you had to pay was Z. Under the new law, an exclusion changes the initial tax amount (X), and with the credit gone, the new initial tax becomes the final tax (X = Z). HOW DO HOMESTEAD BENEFITS CHANGE? Under the old law, the credit itself equaled the homestead benefit, and its calculation depended only on the value of the homestead. Because the credit was subtracted from the initial tax amount, the credit affected each taxpayer independently. Under the new law, the exclusion is still calculated using the value of the homestead, but the tax benefit depends on a variety of factors other than homestead value. Because the exclusion is a reduction in the value subject to tax, it also affects tax rates and the taxes of all properties. WHY IS THIS CHANGE COMMONLY RESULTING IN TAX INCREASES? There are four reasons why the change commonly results in increases: 1) State money is no longer reducing total taxes. For 2012, the state was projected to pay approximately $260 million of local taxes through the credit program. With the change, there will be no state paid credit and the entire local property tax levy will be paid by taxpayers. 2) The reduction in taxable value increases tax rates. With the total taxable value being reduced by the exclusion, raising the same total levy as the prior year requires a higher rate. 3) The reduction in taxable value shifts the relative burdens of who pays. With homestead values reduced, other property types (and homes with higher values) pay a larger share of the tax. 4) The exclusion provides less benefit in low tax rate areas than the credit. The computation of the exclusion and credit amounts are roughly comparable where the tax rate is close to the state average, but in lower tax rate areas the excluded value provides less benefit. High rate areas may see greater benefit. Minnesota Revenue, Understanding Recent Changes in Homestead Benefits 1 COMPUTATION OF CREDIT AND EXCLUSION AMOUNTS Even though the tax benefits of the credit and the exclusion are not equal, the calculation of the exclusion amount is similar to the calculation of the former credit. Both reach their maximum at $76,000 of market value ($304 for the credit; $30,400 for the exclusion). Both reduce to $0 at about $414,000 of market value. Credit = 0.4% of the first $76,000, minus 0.09% of the value over $76,000. Exclusion = 40% of the first $76,000, minus 9% of the value over $76,000. Example: A house valued at $116,000. Credit = (0.4% x $76,000) — ($40,000 x 0.09%) = $304 $36 = $268 Exclusion = (40% x $76,000) — ($40,000 x 9%) = $30,400 — $3,600 = $26,800 WANT MORE DETAILS? CONSIDER THIS THEORETICAL ILLUSTRATION Similarly computed amounts do not yield equal benefits: AVERAGE TAX RATE ILLUSTRATION Old Law: Credit Estimated Market Value $116,000 Exclusion $0 Taxable Market Value $116,000 Class Rate Net Tax Capacity Tax Rate Gross Tax Credit Net Tax 1% $1,160 105.810% $1,227 $268 $959 New Law: Exclusion $116,000 $26,800 $89,200 1% $892 ' 110.920% $989 $0 $989 LOW TAX RATE ILLUSTRATION Tax Rate 63.486% 66.552% Gross Tax $736 $594 Credit $268 $0 Net Tax $468 $594 NOTE: This illustration does not reflect an actual location ,Let's say you live in a house valued at $116,000. Under the old law the full value was taxed, but the new exclusion lowers the taxable value. Different classes of property are taxed at different levels. The first $500,000 of homestead value has a rate of 1%. (Higher value has a rate of 1.25%.) "Net tax capacity" is a term describing the taxable value after class rates are applied. Again, this is lower under the new law due to the exclusion. Tax rates increase because the exclusion shrinks the taxable value. This illustration shows statewide average rates before and after the change. The gross tax under the old law was higher because there was no exclusion, but the credit reduced the net tax. Under the new law the gross and net are the same. Here the increase is modest, but... Tax rates affect the relative strength of the exclusion because multiplying excluded value by a low rate is less beneficial than multiplying it by a high rate. So, under a "low tax rate" example, the increase in tax is more extreme. WHAT ELSE AFFECTS MY TAXES (IN ADDITION TO THE HOMESTEAD BENEFIT)? Local levy decisions, including the effects of changes in state aid and local budget priorities. Market forces can affect property taxes in two ways: • The value of your property may increase or decrease. • The value of other properties may increase or decrease and change the share that your property is of the total tax base, whether your property's value changed or not. Various other changes (the classification or your property, eligibility for other benefits, and miscellaneous law changes) may also affect property taxes. Minnesota Revenue, Understanding Recent Changes in Homestead Benefits 2