Loading...
The URL can be used to link to this page
Your browser does not support the video tag.
Home
My WebLink
About
06-08-2026 - Agenda Packet City Council - Work Session
Agenda City Council Work Session Monday, June 8, 2026, 5:00 PM City Council Chambers 12780 Kelley Parkway, Orono, MN 55356 952-249-4600 /oronomn.gov Roll Call Adjournment Work Session Item 1. Preliminary Budget and Levy Guidance Sign up for email notifications at oronomn.gov AGENDA ITEM Date: June 8, 2026 Title: Preliminary Budget and Levy Guidance Presenter: Maggie Jin, Finance Director Section: Work Session Item Item: 1 Purpose: The purpose of this item is to receive preliminary budget and levy expectations and guidance from the City Council. 2. Staff Recommendation: Provide staff directions on 2027 budget expectations and guidance. COUNCIL ACTION REQUESTED Provide staff directions on 2027 budget expectations and guidance. Exhibits A. Budget Memo and Attachments 2026.06.08 B. Preliminary Budget and Levy Guidance Presentation C. LMC Guide on Municipal Budgeting 2 MEMORANDUM To: Mayor Tunheim and Orono City Council From: Maggie Jin, Finance Director Subject: 2027 Budget Kickoff Date: June 8, 2026 Attachments: A. Budget Timeline B. Budget Process Chart C. Tax Rate and Levy Scenario and Impact Work on the 2027 budget has begun. The budget cycle begins with individual departments preparing their budget requests. During this time, it is requested that City Council provides staff with expectations and guidance for the preliminary budget and levy. The City Administrator and Finance Director will begin to meet within the next few weeks with each department to discuss and refine the department budget requests for General Fund and Internal Service Funds. Once compiled, a draft budget is presented to council at a work session for additional guidance. The budget process is followed by enterprise fund budgets. Each department will prepare their budget requests, followed by meetings with the City Administrator and Finance Director, and then a council work session to present draft budgets. As part of the budget cycle, staff also works to put together a capital improvement plan and fee schedule for the upcoming year. In brief, department heads provide their budget requests to the Finance Department. These requests are reviewed and adjusted during meetings between the Department Heads, the City Administrator, and the Finance Director. The City Council is briefed at the work sessions and provides additional guidance to the development of the Preliminary Budget and Tax Levy. The inputs received from City Council will assist in determining what requests to include in the draft budget. The draft budget will be presented to Council and Council's additional inputs will be incorporated into the budget and levy. Adoption of the Preliminary Budget and Tax Levy occurs at the second City Council meeting in September. For a full overview on the budget process, a budget process timeline and flow chart are attached. Major factors that impact the budget are as follows: • Economic Factor. Inflation has been relatively stable but continues to be a factor in building the 2027 budget. The current annual (March to March) CPI-U is 2.8%. May to May CPI-U will be used to determine factors in the budget. The CPI includes a wide variety of items in its calculation so it does not mean all budget lines are equally impacted. However, the CPI is a good indicator of what is likely to happen to the costs of goods and services. 1 of 7 3 • Wages and benefits. Wages and Benefits make up approximately 62% of General Fund expenditures. It is expected that this expenditure category has the greatest impact on the budget. The city has five labor unions that cover most of the city's employees. The contracts are for 2026 through 2028. Items that are set in the contracts are the wage increases and health insurance coverage plan as well as other benefits such as the MN Paid Leave program. Health insurance premiums are not received until after preliminary budget is adopted, thus a 10% increase is budgeted. • Professional service. Professional services make up approximately 22% of the General Fund expenditures. Internal services provided by the City to other departments includes IT, Fleet and Facilities service, which makes up approximately 10% of the General Fund Budget. • Other Revenues. The police service contracts have built-in cost inflators. For Mound, the service contract pricing is based on CPI-U with a minimum of 1% and a cap of 5%. Current CPI-U is 2.8% for March 2025 to March 2026, with May 2025 to May 2026 to be used. The challenge with this service contract is with the union requests and negotiation. Minnetonka Beach and Spring Park have costs associated with the contracted increase in wages. The cap for all contracts at 5%, however, wage increases are at 6% for Sergeants and Officers. • Taxable Market Value/Tax Capacity. The City's property tax base continued to increase during the 2026 assessment period. While Hennepin County numbers are not final, the current estimated taxable market value has increased 4.5% to $5,623,563,200, which is an increase of $244,582,700. The current estimated tax capacity is $66,222,665. Taking additional factors in, the estimated adjusted net tax capacity for taxes payable in 2026 is $65,609,832, an increase of 4.8%. • At the May 6, 2025 Park Commission meeting, a Tree Inventory Analysis & Maintenance Strategy report was presented. The report identified over $300,000 per year in tree maintenance needs over the next five years. Current demands for tree removals in the right-of-way are exceeding the budget. 2026 budget had $225,000 budgeted for Streets and Parks tree removal. • 2050 Comprehensive Plan is required to be completed per state mandate. The impact to the General Fund is projected to be around $100,000 to $150,000 with staff to follow up in the first draft budget with a more defined estimate. • Shoreline Fire Department went into effect on January 1, 2026 as a standalone entity funded by the cities of Long Lake and Orono, with a contract through 2028 with Minnetonka Beach. Current budget increase for the department is 10-12%. In the future, the city will see some relief in the pressure on the levy as debt service payment falls off. The 2014 GO Improvement Bonds will be eliminated from the levy in 2029. The 2027 budget process has some challenges, with phasing in the levy increases needed to properly fund the capital and operating needs of a new fire department to funding a long-term tree maintenance program and the 2050 comprehensive plan while balancing the remainder of the City's needs. The City's strong financial reserves and long-term funding identified for the 2of7 4 City's capital plan has the City in a good position to navigate the current situation. Staff is proactively looking for additional methods to balance out the internal service funds. Over the past several years, the Council's budget guidance has been to deliver a general fund budget that keeps the tax rate steady. If the Council determines that there is a different objective, staff will work to prepare a budget based on that directive. As part of the budget process, staff will bring additional suggestions in order to make good effort to meet the guidance provided. Included with this memo is a scenario for the property tax levy and rate. The numbers shown are rough numbers and will be refined once each department submits their initial requests. The increase to the General Fund levy is based upon 2026 general fund levy with the addition of actual wage projections, 10% increase to health insurance premiums, an increase in insurance, fleet service and IT service charges, inclusion of cost for the 2050 comprehensive plan and remaining items with a 3% inflator per CPI-U. This scenario takes into account the levy levels that staff had anticipated within the 2026 Capital Improvement Plan for the remaining levy amounts. Also included in this memo and distributed to each department is the budget timeline and process chart. 3of7 5 MAY JUNE JULY 2027 Budget Timeline May 15 — Budget Timeline Distributed to Departments May 15 — Budget Package (Budget Workpaper, Capital Improvement Plan and Fee Schedule) Distributed to Departments to Update June 8 Council Work Session — Preliminary Budget Guidance June 19— General Fund Department and Internal Service Fund Budget Draft due to Finance June 22 to June 26 — Meeting between Department Head, Finance and City Administrator for General Fund/Internal Service Funds July 13 Council Work Session — General Fund and Internal Service Funds Budget and Tax Levy Update July 24 — Enterprise Fund Draft due to Finance July 27 to July 31— Meeting between Department Head, Finance and City Administrator for Enterprise Funds AUGUST August 10 Council Work Session — Enterprise Funds Budget Update August 29—Additional General Fund Budget Updates due to Finance SEPTEMBER September 14 Council Work Session — Preliminary Levy / Budget September 25 — Capital Improvement Plan Draft due to Finance September 28 Council Meeting — Preliminary Levy / Budget Adoption OCTOBER October 12 Work Session — Draft Capital Improvement Plan October 27 Work Session — Draft Capital Improvement Plan October 30 — Fee Schedule Draft due to Finance 10UNITINITA: C November 9 Work Session — Fee Schedule Update November 16 —Additional Budget, Capital Improvement Plan, Fee Schedule Updates due to Finance DECEMBER December 7 Council Meeting — Truth in Taxation Hearing and Final Levy / Budgets, Capital Improvement Plan, Fee Schedules Adopted December 28 — Staff submits report to County and State by this date Staff Council Work Session/Meetings 4 of 7 6 �c G ' Goal Setting Planning > Preparation I Review a& Approval Finance Begins Initial Preparation Timeline Distributed to Departments Budget Package Distributed to Departments Staff Continues to Refine Budget and Tax Levy V) Budget Review: Enterprise D Fund Budget and Utility Rate Study Update Q(Work Session) Staff Develops Enterprise Funds Budgets Preliminary Budget and Budget Review: General Fund and Internal Service W Levy Discussion >- Funds Budget and Tax Levy (Work Session) Z) (Work Session) Staff Develops General and Staff Meet to Discuss First Internal Fund Budgets Draft of General Fund Budget Staff Council Work Session/Meetings Preliminary Budget and Levy Update LL J (Work Session) CO W , L W to Staff Develops Capital Improvement Plan (CIP) Adopt Preliminary General Fund Budget & Tax Levy (Council Meeting) ' Of W CO Capital Improvement Plan O (CIP) Review U(Work Session Part 1) O Capital Improvement Plan (CIP) Review (Work Session Part 2) Adopt Budgets, Tax Levy, CIP & Fee Schedule (Council Meeting) CO cW G W Truth In Taxation Hearing W (Council Meeting) n Fee Schedule Review (Work Session) DC ,W G W Staff Continues to Refine OBudget Z Staff Updates Fee Schedule Staff Submit Reports to County and State 5of7 7 TAX CAPACITY Net Tax Capacity (Adj Net Tax Capacity) LOCAL LEVY Total Local Certified Tax Levy City Tax Capacity Rate I rep �yel UTTO Ira :WeIN 9 :60111111111111 General Fund Facilities Fund Fire Capital Fund Pavement Management Parks GO Improvement 2014 GO Improvement 2021 Total City Tax Capacity Rate City of Orono 2027 Annual Budget Tax Rate 2027 Over / Under 2026 Actual Estimated 2026 2027 Amount Percent $ 62,625,370 $ 65,609,832 $ 2,984,462 4.77% $ 10,278,500 $ 11,492,900 $ 1,214,400 11.81% 16.414% 17.517% 1.103% 11.74% 12.70% 0.96 0.36% 0.34% -0.02 0.73% 0.82% 0.08 1.60% 1.68% 0.08 0.30% 0.38% 0.08 0.47% 0.45% -0.03 1.21% 1.15% -0.06 16.414% 17.517% 1.10 *Hennepin County 2026 Proposed Tax Rate for the City of Orono is at 16.407% Levy Detail 2027 Over / Under 2026 Actual Estimated TAX LEVIES 2026 2027 Amount Percent General Fund $ 7,349,900 $ 8,331,800 $ 981,900 13.36% Facilities Fund 225,000 225,000 - 0.00% Fire Capital Fund 460,000 535,000 75,000 16.30% Pavement Management 1,000,000 1,100,000 100,000 10.00% Parks 190,000 250,000 60,000 31.58% GO Improvement 2014 296,900 294,600 (2,300) -0.77% GO Improvement 2021 756,700 756,500 (200) -0.03% Total Local Certified Tax Levy $ 10,278,500 $ 11,492,900 $ 1,214,400 11.81% 6of7 Effect of 2027 Tax Levy & Budget on Residential Properties Median 1.73% Increase in Market Value Actual Estimated Actual Estimated Actual Estimated Actual Estimated Actual Estimated 2026 2027 2026 2027 2026 2027 2026 2027 2026 2027 Value $250,000 $254,323 $500,000 $508,646 $1,129,600 $1,149,132 $2,000,000 $2,034,582 $4,000,000 $4,069,164 Market Value Exclusion (MVE) * $24,050 $23,661 $1,550 $772 $0 $0 $0 $0 $0 $0 $225,950 $230,662 $498,450 $507,874 $1,129,600 $1,149,132 $2,000,000 $2,034,582 $4,000,000 $4,069,164 Tax Value Tax Capacity (Net) ** 2,260 2,307 4,985 5,098 12,870 13,114 23,750 24,182 48,750 49,615 Tax Capacity Rate 16.414% 17.517% 16.414% 17.517% 16.414% 17.517% 16.414% 17.517% 16.414% 17.517% Net City Tax $370.87 $404.05 $818.14 $893.09 $2,112.44 $2,297.21 $3,898.25 $4,236.02 $8,001.67 $8,691.00 Annual $ Change from 2026 $33.18 $74.95 $184.77 $337.77 $689.33 Monthly $ Change from 2026 $2.77 $6.25 $15.40 $28.15 $57.44 %Change from 2026 8.95% 9.16% 8.75% 8.66% 8.61% As of 2025, Market Value Exclusion = First 40% of the first $95,000 of market value. For homestead value between $95,000 and $517,200, the exclusion is $38,000 minus 9% of the value over $95,000. Homesteads valued at $517,200 or more do not receive the exclusion ** Tax Capacity (net) =1% of first $500,000 market value, plus 1.25% of all value over $500,000 The Market Value adjustment is based on the average market value increase on a residential property =1.73% Median home value in Orono in 2026 is $1,129,600. 7of7 9 N \k�s H 0!ko: 2027 BUDGET Budget Introduction, Goal Settings & Priority June 8, 2026 10 MTr • - a uw"e December Truth in Taxation Hearing Adoption of Final Budgets, Tax Levy, Capital Improvement Plan and Fee Schedule November Draft Fee Schedule Presented to City Council October Draft Capital Improvement Plan Presented to City Council May Staff begins budget preparations September Preliminary General Fund Budget and Tax Levy Approved by City Council June Council sets expectations and priorities JUN Draft General Fund and Internal Service Fund Budget and Tax Levy Presented to City Council August Draft Enterprise Fund Presented to City Council 2027 Budget Process • General Fund and Internal Service Fund Budgets development • Each department develop budgets and submits to Finance Department • Council provides expectations and guidance • City Administrator and Finance Director meet with departments to refine budget with each department • Draft budget is presented to Council at work session • Budget is refined further and preliminary budget and tax levy presented at work session • Preliminary budget and tax levy adopted at September 28 Council Meeting • Levy amount can be lowered, but not increased • Will be used as the basis for the Truth -in -Taxation Statements • Hennepin County mails out proposed taxes in November based on preliminary tax levy • Enterprise Fund Budgets development • Each department develop budgets and submits to Finance Department • City Administrator and Finance Director meet to refine budget with each department • Draft budget is presented to Council at work session 2027 Budget Process continue... • Capital Improvement Plan • Staff develops the capital improvement plan • Draft capital improvement plan presented to council at work sessions in October • Fee Schedule • Staff develops the fee schedule • Draft fee schedule presented to council at November work session • December 7 Council meeting — TNT hearing, Adoption of Final Levy/Budgets, Capital Improvement Plan and Fee Schedule • Staff submits report to County by December 28 and State by December 30 • Further updates to the public: newspaper posting, newsletter, UB inserts, FB posting, website updates Past 10 Years Tax Rates 18.000% 17.500% iWAII1IIVA 16.500% 16.000% 15.500% 15.000% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Tax Rate •••••• 10-Year Average Budget Year Tax Rate 2017 16. 759% 2018 16. 555% 2019 16. 406% 2020 16.512% 2021 16. 780% 2022 16.820% 2023 16.569% 2024 16.349% 2025 16. 361% 2026 16.414% J14j 2026 Final Tax Rate Comparison [i81111111VA, 50.000% 40.000% 30.000% 20.000% 10.000% 0.000% Orono Tonka Bay Wayzata Minnetrista Medina Minnetonka Beach Spring Park Long Lake Mound Hennepin County Maple Plain Average Property Tax Distribution State of Minnesota City of Orono Average Property Tax Distribution School District 278 Property Tax Distribution School 29.0% School 32.8% wa4k District State/Metro/ 10.0% Other District A7 4% 17.3% County Hennepin 41 County L30.0% 42.5% *Per MN State's 2025 Tax Presentation. Ll6 Other Jurisdictions Levy Comparison 60.000% 50.000% 40.000% 30.000% 20.000% 10.000% 0.000% • County Levy increase in 2026 was 7.8% • Neighboring Cities' average 2026 levy increase was 9.97% • Orono Levy increase in 2026 was 6.72% Tax Rate vs. Levy Increase Orono Tonka Bay Wayzata Minnetrista Medina Minnetonka Beach Spring Park Long Lake Mound Maple Plain 2026 2025 / 2026 Tax Rate Levy Increase 17 2027 Budget Impacts Inflation — CPI (March 2025-March 2026): 2.8% Will be using May 2025-May 2026 for reference (release June 10) Estimated Taxable Market Value increased by 4.5% Estimated Adjusted Net Tax Capacity increase by 4.8% Wages: Local 12 and 49 — 3% COLA Adjustment with 1% Market Adjustment LELS 40 and 168 — 3% COLA Adjustment with 3% Market Adjustment Police Service contract with Mound is based on CPI-U and not wage increase Benefits • Health Insurance — beginning 2026, City has agreed to cover 100% of insurance premium for employees with a $100/month additional stipend • Budgeted for a 10% increase in premium 2025 Cafeteria Plan Medical/Rx Advantage Health Plan Monthly Rate Employer Monthly Contribution Remaining Allowance Single $730.68 $915.00 $184.32 Employee + Spouse $1,581.10 $1,715.00 $133.90 Employee + Child(ren) $1,297.62 $1,715.00 $417.38 Family $2148.02 $1,715.00 -$433.02 Waived $184.32 $184.32 2026 Cafeteria Plan Medical/Rx Advantage Health Plan Monthly Rate Employer Monthly Contribution Remaining Allowance Single $730.68 $830.68 $100.00 Employee + Spouse $1,581.10 $1,681.10 $100.00 Employee + Child(ren) $1,297.62 $1,397.62 $100.00 Family $2,148.02 $2,248.02 $100.00 Waived $100.00 $100.00 2027 Budget Impacts Continued... Shoreline Fire Department (SLFD) Budget to be approved at the July 8th board meeting and brought to the July 13th Council meeting. 1st draft budget anticipate increase of approximately 10-12% increase for operating budget and 5.5% for capital budget. 2050 Comprehensive Plan Scenario shown today has $150,000 as a rough placeholder with more information to be obtain by the first draft of budget. Tree Management The 2025 tree inventory & maintenance strategy report analysis calls for over $300,000 per year in tree maintenance cost. Current scenario shows Internal Service Fund Catch -Up • Insurance Fund — 16.7% increase overall to breakeven with 2026 actual for property/casualty • 24.5% increase within the General Fund • Fleet Fund — Minimum increase of 19% needed to breakeven with 2027 expenditures • IT Fund — Minimum increase of 29% needed to breakeven with 2027 expenditures Future Budget Outlook • SLFD expenditures will stabilize overtime • Gain data on what a standalone entity operation costs • Capital improvement and replacement is analyzed and planned efficiently • Internal Service Funds' revenue is moving towards breaking even with expenditures, thus past year's negative income can be rectified and future years can stabilize • 2029 Budget year will see 2014A Bond eliminated 2027 Budget Additional Considerations Strategic Planning New Positions (ex. Arborist) Additional Community Events 21 Levy Detail (Sample Scenario) TAX LEVIES General Fund Facilities Fund Fire Capital Fund Pavement Management Pa rks GO Improvement 2014 GO Improvement 2021 Actua 1 2026 $ 71-349, 900 225,000 460,000 1,000.1000 190, 000 2961900 7561700 Estimated 2027 $ 81,3311800 225,000 535,000 1,100,000 250,000 294,600 756,500 2027 Over / Under 2026 Amount Percent $ 9811900 13.36% - 0.00% 751000 16.30% 1001,000 10.00% 601,000 31.58% (2,300) -0.77% (200) -0.03 % Total Local Certified Tax Levy $ 10,278,500 $ 11,492,900 $ 1,214,400 11.81% Tax Rate Scenario TAX CAPACITY Net Tax Capacity (Adj Net Tax Capacity) LOCAL LEVY Total Local Certified Tax Levy City Tax Capacity Rate Actua 1 2026 62,625,370 $ 10,278,500 16.414% 2027 Over / Under 2026 Estimated 2027 Amount Percent $ 65,609,832 $ 2,984,462 4.77% $ 11,492,900 $ 1,214,400 11.81% 17.517 % 1.103 City Taxes on Median Value Home Tax Capacity Rate Net City Tax $ Change from 2026 Change from 2026 Actual Estimated Estimated 2026 2027 2027 16.414% 16.414% 17.517% $2,112.44 $2,152.51 $2,297.21 $40.07 $184.77 *Median home market value of $1,129,600 in 2026 *Estimate shown is based on preliminary tax capacity information 1.90% 8.75% 24 Next Steps Tonight, staff is requesting expectations, inputs, and guidance from City Council in developing the preliminary budget and tax levy For the final budget and tax levy, numbers can be reduced from preliminary numbers and cannot be increased. Next few weeks: Department Heads, City Administrator and Finance Director meetings July 13 Council Work Session — General Fund and Internal Service Funds Budget and Tax Levy Update Thank You SHO 26 0 LHC LEAGUE HANDBOOK FOR MINNESOTA CITIES M I N N ESOTA Chapter 20 CITIES Municipal Budgeting Table of Contents I. Public versus private budgeting.....................................................................................................................3 II. Budgeting basics and funds...........................................................................................................................4 III. Municipal budget is a plan............................................................................................................................5 A. Local Performance Measures........................................................................................................................6 B. Budget cycle..................................................................................................................................................6 IV. Budget as a communication tool...................................................................................................................9 A. Explain city financial conditions in budget documents.................................................................................9 B. Tie budgeting to goals in budget documents...............................................................................................10 C. Foster citizen involvement in budget process.............................................................................................10 D. Link citizen input to budget decisions.........................................................................................................10 E. Use the budget to communicate the value of government...........................................................................11 V. Budget structures.........................................................................................................................................11 VI. Revenues.....................................................................................................................................................11 A. Tax revenue.................................................................................................................................................12 B. Franchise fees..............................................................................................................................................13 C. License and permit revenue.........................................................................................................................13 D. Intergovernmental revenue..........................................................................................................................14 E. Charges for services....................................................................................................................................17 F. Public safety revenue...................................................................................................................................17 G. Culture and recreation.................................................................................................................................17 H. Enterprise funds...........................................................................................................................................17 I. Penalty charges............................................................................................................................................17 J. Special assessment revenue.........................................................................................................................18 K. Miscellaneous revenues...............................................................................................................................18 L. Other revenue..............................................................................................................................................18 VII. Expenditures................................................................................................................................................18 A. General government....................................................................................................................................19 B. Public safety................................................................................................................................................19 C. Culture-recreation........................................................................................................................................20 This material is provided as general information and is not a substitute for legal advice. Consult your attorney for advice concerning specific situations. 145 University Ave. West www.Imc.org 9/10/2024 Saint Paul, MN 55103-2044 (651) 281-1200 or (800) 925-1122 © 2024 All Rights Reserved 27 D. Conservation of natural resources...............................................................................................................20 E. Debt service.................................................................................................................................................20 F. Miscellaneous expenditures.........................................................................................................................21 VIII. Capital improvements..................................................................................................................................21 IX. Other regulations impacting municipal budgets..........................................................................................21 A. GASB..........................................................................................................................................................21 B. State auditor reports.....................................................................................................................................22 C. Taxation notification procedure..................................................................................................................22 X. Plan B cities.................................................................................................................................................24 XI. Charter cities................................................................................................................................................24 XII. Conclusion...................................................................................................................................................25 League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 2 28 L F1 C LEAGUE MINNESOTA CITIES HANDBOOK FOR MINNESOTA CITIES Chapter 20 Municipal Budgeting Learn the characteristics of city budgets as a work plan and communication tool. Understand the budget cycle and structures, sources of city revenue, typical expenditure categories, and planning for multiple year expenditures, like infrastructure, with a separate capital budget. Become aware of how GASB and Truth in Taxation impact budgeting. RELEVANT LINKS: Minn. Stat. § 412.221. I. Public versus private budgeting Cities are under great pressure to streamline operations and meet strict financial standards at the same time. Sustainability is an overarching concern for cities. Simply adopting last year's budget is not acting in the city's best interest. Done thoroughly, city budgets reflect city plans, policies and goals regarding services and sound resource management. Consider city goals, what programs and services citizens want in the city and then look to sustaining or allocating funding for those goals, using the budget document as an important communication tool revealing a city's plan for the coming year A city is a municipal corporation but budgeting in the public sector is different than it is in the private sector. The table below illustrates some of the major differences in terms of scope, law, and process. PRIVATE OR NON - CITIES GOVERNMENTAL ORGANIZATIONS (NGOS) Provide services and programs for the Provide services to a discrete set of entire community. customers. Budgets focus on public safety and Allocate money to meet shareholder or well-being of the community as a owner expectations for profit. whole. Must fund a wide variety of activities Focus spending on narrowly defined from safe roads and clean water to programs or services. economic development. Subject to a significant number of state Not subject to such extensive and and federal mandates or laws that numerous legally binding mandates that legally require cities to provide certain require both provision and levels of services but do not provide funding for service. them. This material is provided as general information and is not a substitute for legal advice. Consult your attorney for advice concerning specific situations. 145 University Ave. West www.imc.org 9/10/2024 Saint Paul, MN 55103-2044 (651) 281-1200 or (800) 925-1122 © 2024 All Rights Reserved 29 RELEVANT LINKS: Minn. Stat. § 6.745. Minn. Stat. § 471.6965. See Sections X-XII, Plan B cities, Standardplan cities, Charter cities. Minn. Stat. § 471.696. Minn. Stat. § 412.711 CITIES PRIVATE OR NON- GOVERNMENTAL ORGANIZATIONS (NGOS) Must not borrow money from a bank Obtain funds by borrowing money to build but issue debt in the form of bonds to or improve business or buildings. build public infrastructure such as roads and bridges. Use taxing authority to raise funds to Charge for services or programs at a cost provide services and programs often at that includes a profit. or below cost. Prepare budgets in public and include Prepare budgets in private with no public the public in the process and in the participation. final product. Must make budgeting decisions by Often vest decision -making authority in consensus. one person. Competing interests are a given when Fewer competing interests - making a cities prepare budgets. profit and/or being competitive is typically the focus. Must budget for services in good and Make budget decisions based on bad markets based on community competition with other businesses and on needs, goals and objectives. market conditions. Subject to stringent and Not subject to public accounting and comprehensive financial controls and financial controls or public scrutiny of public reporting to prevent funds and spending activities. mismanagement and misuse of public funds. II. Budgeting basics and funds Budgeting is basically planning and prioritizing goals for the coming year based on experiences in the past year or years. All cities are required to prepare and adopt an annual budget. By law in Minnesota, the fiscal year of a city and all its funds must be the calendar year. Thus, for cities, a budget is one year of estimated money coming in (revenue) and money going out (expenditures). The council adopts the budget by a resolution which sets forth the total for each budgeted fund and each department. Note: Cities organized under Plan B form of government, and cities with home rule charters, special laws, local ordinances or unique circumstances may have additional or special budgeting requirements and considerations. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 4 30 RELEVANT LINKS: A city budget is a comprehensive financial plan for one year. It is a snapshot in time of city activities and services supported by discrete city funds for the coming year. In governmental accounting terms, a "fund" is a sum of money set aside for a specific purpose —not necessarily a separate bank account —but tracked on paper separately. The three basic city fund types are: Handbook, Financial • Governmental funds —used to finance most governmental services and Reports, Accounting and based on tax revenues, special assessments, or issuing debt. The city's Auditing• general fund, debt service funds (to pay off bonds), and capital project funds are examples of governmental funds. • Proprietary funds —financing for governmental activities operating like a private business, for example, water and sewer utilities, electrical utilities, or municipal liquor stores. Service charges usually provide most of these funds. • Fiduciary funds —trust and agency funds used to account for assets a city holds in a trustee capacity or as an agent, for example, pension funds. Fiduciary funds cannot be used to support the city's own programs. See Sections vt and vit, The Office of the State Auditor (OSA) provides the Uniform Chart of Revenues and Expenditures. Accounts to facilitate the preparation of uniform annual financial statements. Uniform chart of Accounts, The outline of accounts may also serve as a useful checklist when preparing Office of the State Auditor. city budgets. Every city should consult this chart when preparing the annual budget and maintaining financial records. The OSA recommends the adoption of the uniform account numbering system for all cities, including cities under 2,500 in population, whenever practical. Preparing city budgets involves policy decisions about the use of money, and it helps cities make important decisions, tying funding to specific goals set by the council. During the budgeting process, city council members and staff look back to what programs and services worked the previous year and they look forward to what city activities may be changed, dropped, or increased in the coming year. III. Municipal budget is a plan To make a useful municipal budget, examine all city services and programs, for example, firefighting services, police protection services, water and sewer services, elections, park and recreation programs and maintenance, snowplowing, and any other city -funded activity. Include personnel costs, office supplies, computers, software, building and maintenance supplies, fuel costs, and any other equipment. These are the current expenditures. Next look at money coming in, or revenue, from all sources. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 5 31 RELEVANT LINKS: As explained in more detail below, property taxes are the largest source of revenue for cities. In order to balance the budget, total estimated revenues must be equal to or exceed total estimated expenditures. The budget sets out a council's yearly plan to maintain, change, add or drop services and activities. Planning a city budget includes a fund balance, or unrestricted money Fund Balances for Local Governments, statement of available to cover unexpected costs. The state auditor recommends but does Position, office of the state not require that cities keep a minimum of five months' operating costs on Auditor, Feb. 2014. LMC website: "City Fund hand and accessible to cover such unanticipated costs. Some city councils Balances 101". believe that higher fund balances provide more protection against unforeseen emergencies. Section V111, Capital Cities often budget and plan separately for capital improvements because the Improvements. process covers more than one year. Capital improvements include planning for replacing, repairing and maintaining infrastructure such as streets, sidewalks, water and sewer systems, transportation, buildings and parks. Planning for future infrastructure costs is essential. Without it, cities run the risk of costly emergency repairs to local infrastructure. A. Local Performance Measures Minn. stat. § 6.91. Cities that elect to participate in the standard measures program must report Performance Measurement its results to its citizens annually through publication, direct mailing, and Program, office of the state posting on the jurisdiction's website, or through a public hearing at which Auditor the budget and levy will be discussed and public input allowed. Participating cities must report their results to the state auditor. The state auditor must compile the results, make them available to all interested parties, publish them on the auditor's website, and report them to the legislative tax committees. Minn. stat. § 6.91. A city that elects to participate in the standard measures program may benefit in these ways: • Eligible for reimbursement of 14 cents per capita, but not to exceed $25,000 for any government entity. • Exempt from levy limits for taxes payable in the following year, if levy limits are in effect. B. Budget cycle Budget Process, City of The process of annual budget preparation occurs within the framework of Hopkins. the state property tax system. Property taxes are generally the primary revenue source for Minnesota cities. Each fall, cities submit their property tax levies for the upcoming year to the county auditor. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 6 32 RELEVANT LINKS: Counties are responsible for property tax administration; the Department of Revenue provides assistance and oversight. Section v1, Revenues. Minnesota cities also participate in a revenue -sharing program known as local government aid (LGA). LGA supplements property tax revenue. Section 1x.C, Truth -in- Cities must prepare and adopt proposed budgets and proposed property tax Taxation. levies each year. Cities over 500 in population that propose a property tax increase are required to provide notice of the proposed budget adoption and to allow public input on the proposed budget and property tax levy. The "truth -in -taxation" (TNT) process is described later in this chapter. Cities generally prepare budgets in the summer with the following due dates, although particular dates may vary by year if a due date falls on a holiday or a weekend: Minn. Stat. § 477A.014. Minn. Stat. § 275.74, subd. 1. • On or before Aug. 1: The Department of Revenue notifies cities of state Minn. Stat. § 275.065, subd. aid amounts. 1. Minn. Stat. § 275.065, subd. • On or before Set 1: The Department of Revenue notifies cities of the Sept. p 6. applicable levy limit, if any. • On or before Sept. 30: Cities must adopt their proposed budget and certify their proposed levy to the county auditor. Note: Once cities certify a proposed levy in September, they may decrease the amount when they certify a final levy in December —but Minn. Stat. § 275.065, subd. 1 may not increase it. • Between Nov. 25 and Dec. 20: The TNT public comment hearings, if Minn. Stat. § 27s.o66. required, must occur. Remember to check current calendars for each Minn. Stat. § 275.07, subd. 1. year's due dates. • On or before five working days after December 20 in each year: LMC information memo, Cities must adopt a final tax levy and certify that final property tax levy Budget Guide for Cities. to the county auditor. If this deadline is missed, the final levy for 2019 will stay the same as it was in the previous year. Minn. Stat. § 477A.015. Cities generally receive property tax revenues and state aid at various times. Minn. Stat. § 273.1384, subd. 4. The county treasurer distributes property tax revenues to cities in two LMC website: Dates for city payments. The Department of Revenue distributes LGA payments to cities Budgets 101. in two equal installments, on or around July 20 and Dec. 26 each year. City budgeting never stops. While city councils and staff are preparing new annual city budgets, they are also tracking and reviewing the current year's revenues and expenditures. As cities implement a new year's budget, they are also auditing and reporting on the past year's expenditures. Preparation, approval, implementation, and audit review comprise the ongoing budget cycle. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 7 33 RELEVANT LINKS: 1. Budget preparation Cities begin budget preparations in May or June, examining current economic trends, as well as all revenue sources and expenditures and proposing increases or decreases accordingly. City staff collects budget information and presents it to the council at meetings where interested citizens may participate. The goal of budget preparation is to balance all revenues and expenditures, prioritize capital improvements, and appropriately manage outstanding debt. 2. Budget approval Minn. Stat. § 275.07, subd. 1. By law in Minnesota, the fiscal year of a city and all of its funds is the Section VI, A 2. Setting the property tax levy Within calendar year. By December of each year cities determine their financial limits. condition. Cities adopt a new budget late in December to begin in January of the coming year. 3. Budget implementation City councils must monitor the current budget, directing how staff accounts for expenditures and revenues. The Importance of Internal One important step is for council to adopt a policy on internal controls, Controls, Statement of Position, Office of the state meaning that the council sets the rules to prevent misuse of public money. Auditor For example, if possible, the same person should not be taking in money and Credit Card Use and Policies, Statement of Position, Office paying it out. This `segregation of duties' is part of a policy on internal of the state Auditor• control and budget implementation crucial to appropriate use of public funds. Petty cash (Imprest) Funds, policies on the use of petty cash (known as imprest funds in financial Statement of Position, Office of the state Auditor. jargon) and credit cards also help protect cities from loss or misuse of public funds. 4. Budget audits Minn. Stat. § 471.697, subd. City councils must audit budgets, depending on the size, structure, and 1. Minn. Stat. § 471.49, subd. annual revenues of the city. The state auditor publishes the audit threshold in 10• early February of each year. Minn. Stat. § 412.591, subd. At a minimum, a city with a population of 2,500 or less and a combined 2. Minn. Stat. § 412.02, subd. 3. clerk/treasurer must have an annual audit done by a certified public Handbook, Financial accountant if its annual revenue is greater than $272,000—for the year Reports, Accounting and Auditing. ending Dec. 31, 2022. A city with a combined clerk/treasurer and annual revenue of less than $272,000 (for the year ending on Dec. 31, 2022) must Audit Requirements for Cities, Frequently Asked have an audit done by a certified public accountant once every five years, Questions, Office of the state and the person doing the auditing will select the year to be audited. Auditor. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 8 34 RELEVANT LINKS: A city with a population over 2,500 must have an annual audit performed. Remember to check with the state auditor for current audit thresholds in February of each calendar year. 5. Budget amendments City budgets are not set in stone. Many cities must revise their original budgets over the course of the year for a variety of reasons. Amending the budget is not illegal nor is it necessarily undesirable. Typically, city councils simply note the reason for amending the city budget and adopt the amendment in a resolution. Minn. star. § 412.731. However, in Minnesota's 19 Plan B cities, resolutions reducing amounts in Section X: Plan B cities. the budget or authorizing transfers from unencumbered balances must pass by a four -fifths vote of all the members of the council. City of Eden Prairie, For cities over 2,500 in population, the Governmental Accounting Standards 2023 Comprehensive Financial Report Recipient of Board (GASB) requires that cities include the original budget and budget Comprehensive Annual amendments in budget reports, such as the comprehensive annual financial Financial Report award from GFOA. Governmental report. Accounting Standards Board. (GASB 34). IV. Budget as a communication tool 2023 Corporate Report to the City councilmembers, as policymakers, must understand budget documents. Community: City of Bloomington. Making a city budget understandable to citizens is not easy. Using the budget process and product to communicate with the public, by Comprehensive Annual Financial Report city of showing what services resident tax dollars fund, is one way to make Arden Hills. budgeting meaningful for council members and residents. Government Finance An award was created by the Government Finance Officers Association to Officers Association (GFOA): sort by state to see recognize government entities that extract information from their all Minnesota recipients of comprehensive annual financial report to produce high quality annual the Distinguished Budget Award. financial reports specifically designed to be readily accessible and easily Certificate of Achievement understandable to the general public and other interested parties without a for Excellence in Financial background in public finance. Reporting Program. A. Explain city financial conditions in budget documents Comprehensive Annual Citizens have a sense of the current economy but may not understand how Financial Report 2023, City of Richfield. the state economy impacts city budgets. City councilmembers also need to look at the city budget in light of overall economic conditions. In the budget documents, explain which of these state and local challenges affects your city: League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 9 35 RELEVANT LINKS: • Interest rates on city investments have been on the rise resulting in an increase in interest income. • The interest rate on bonds reflects the increasing interest rates in the market, making projects more expensive with a higher interest component. • State aid has increased with one-time allocations from the surplus • Unpaid utility charges/challenges with utility charge collections • Abandoned or vacant properties. • Employee recruitment and retention challenges City budget documents build on the past year and project into the coming year. Communicating an accurate picture of the city's financial condition helps citizens and council develop strategies to sustain the city. B. Tie budgeting to goals in budget documents Citizens support goals, not just expenditures. For example, all cities share the critical responsibility to hold elections. One city sets a goal in the annual budget to "continue providing efficient and friendly non -partisan voter registration, absentee, and election day services" and tracks everything related to that goal in the annual budget document. Citizens are therefore able to understand and support the city's expenditures related to elections. C. Foster citizen involvement in budget process City of Hopkins, City Budget Many cities use citizen surveys to determine city priorities and guide budget Process. decisions about the level of city services provided. Given the stress on city City of Minnetonka: Budget budgets and the expenses of a city-wide survey, a number of cities seek Feedback, citizen input on the city budget simply by providing a way to submit ideas, City of Worthington, Budget questions or comments about the budget through the city website. Cities may Information. also seek citizen input from targeted discussion groups, advisory boards and public meetings during the development of the budget. Even though allowing citizen participation is required in cities with population over 500, the required participation does not occur until late in the budget cycle. Cities may wish to publicize the budget process or calendar to encourage citizen participation earlier in the year. D. Link citizen input to budget decisions Once a city engages citizens in the budgeting process, include that participation and comments in the budget documents. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 10 36 RELEVANT LINKS: For example, if many citizens comment on the need to revitalize certain commercial or residential areas of the city, include the comments and actions that the city council takes on that issue in the budget document, even if it is a preliminary plan to investigate revenue related to revitalization. Then, citizens see how their involvement impacts the city's budget process and plan. E. Use the budget to communicate the value of government City of Shakopee, Property Easy to understand information on what programs and services a city tax Tax Receipt dollar supports helps citizen understand the value of government and city budgets. City budgets necessarily focus on the overall cost of a service, for example, police protection. But, looking at city budgets from the opposite end —how much tax revenue comes into the city from each home and all the services those dollars support —shows a more accurate picture of the value of city services to residents. V. Budget structures Most cities approach budgeting using a particular format. The most common budget techniques cities use include the following formats: • Line item budgets: the simplest budgeting structure showing each expenditure on a separate line. • Program budgets: presents budgeting information around particular programs instead of simple line item expenditures. • Performance budgets: rather than just expenditures, includes service goals and objectives, and measures outcomes related to expenditures. • Zero -based budgets: starts with funding city services at a minimum level and working up from there to a level of funding that councils agree is appropriate for each city service. Many city budgets contain a mix of these formats. The format is simply a way to present information on expenditures so that city councils may decide which services the city will fund, and at what level, for the coming year. VI. Revenues Minn. Stat. § 410.32. City budgets start with a picture of revenue (money coming in). Minnesota Minn. Stat. § 412.301. law greatly restricts the available types of local revenue sources. Unlike Minn. Star. § 297A.99, subd. t (d). some other states, local governments in Minnesota may not impose an income tax. In addition, without specific legislative authority, cities may not impose a local sales tax, and the local sales taxes that have been granted are usually for specially designated purposes. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 11 37 RELEVANT LINKS: Minn. Stat. § 297A.99, subd. A political subdivision may not advertise or expend funds for the promotion 1 (d). of a referendum to support imposing a local option sales tax, but a city may expend funds to: • Conduct the referendum. • Disseminate information included in the resolution but only if the disseminated information includes a list of specific projects and the cost of each individual project. • Provide notice of and conduct public forums at which proponents and opponents of the referendum are given equal time to express their opinions on the merits of the referendum. • Provide facts and data on the impact of the proposed local sales tax on consumer purchases. • Provide facts and data related to the individual programs and projects to be funded with the local sales tax. Understanding where city funds come from is the first step in developing a budget plan. Based on the state auditor's uniform chart of accounts, revenue for most cities includes money from the following 13 categories. A. Tax revenue Minn. Star. Ch. 275. Tax revenue includes current property taxes; delinquent property taxes; Minn. Stat. § 282.08. Minn. Stat. § 216B.025. apportionments from tax forfeit sales; franchise and public utility taxes; and Minn. Stat. § 276.131. city sales, gambling, and local lodging taxes, if any. Cities in Minnesota Minn. Stat. § 349.213. Minn. Stat. § 469.190. receive a variety of shared tax revenue, or general state aid, from the state. Amounts for each city are typically available from the Minnesota Department of Revenue on or before Aug. 1 of each year. 1. Property tax revenue LMC website: Property The property tax is the primary revenue source for cities, and it applies to all Taxation 101. taxable property within city boundaries. The Minnesota property tax system is complicated, including classifications Accounting Manual for Small Cities and Towns in of property based on the use of the property. Over time, the system has Minnesota• become more complex. Local officials, however, can only control local levy Uniform Chart of Accounts, Office of the state Auditor. decisions and must focus on that for budgeting purposes. 2. Setting the property tax levy Each year, cities certify a property tax levy for the following year in dollars, not at a specific rate. The council should set a tax levy high enough to provide money for the following purposes during the upcoming budget year: League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 12 38 RELEVANT LINKS: Minn. Stat. § 477A.011. Minn. Stat. Ch. 275. . Payment of all estimated expenditures, including an allowance for a Minn. Stat. § 275.70, subd. 5. reserve and the amount necessary to make all city contributions to the Handbook, Property Tax Public Employees' Retirement Association (PERA). Levy. • Current expenditure liabilities the city cannot pay in the present year for lack of current funds or that the city will pay through short-term borrowing. • Repayment of all tax anticipation certificates the city issued during present and past years. • An amount in anticipation of any reduction or loss of state aid, federal revenue, or other undependable sources of revenue. • For the payment of interest and repayment of principal on bond issues before the bonds are delivered. (Bonds issued previously are already funded by a portion of the city levy). 3. Gambling taxes and funds Minn. Stat. § 349.213, subd. Cities may impose up to a 3 percent local gambling tax on licensed 3. gambling organizations in order to cover the cost of regulating lawful gambling. A city may not use these tax revenues for any other purpose. Minn. Stat. § 349.213, subd. Cities may also require organizations conducting lawful gambling to 1(a). contribute 10 percent of their net profits derived from lawful gambling to a city -administered fund to be disbursed for lawful purposes. State law defines lawful purpose. Such funds cannot be used for the benefit of a pension or retirement fund. See LMC information memo, For further discussion of lawful gambling expenditures and regulation, see Lawful Gambling. LMC information memo, Lawful Gambling. B. Franchise fees Minn. Stat. § 216s.36. Cities are authorized to impose a franchise fee on utility services, such as 47 U.S.C.A. § 542. Accounting Manual for Small gas, electric, and cable television. Franchise fees for gas and electric utilities Cities and Towns in are subject to negotiation. Cable franchise fees are limited to no more than 5 Minnesota. percent of the cable operator's gross revenues over a 12-month period. Uniform chart of Accounts, The revenues from franchise fees can be useful in offsetting a city's costs to Office of the State Auditor. regulate these businesses and maintain and protect the public right-of-way. The state auditor classifies franchise fees as "other taxes." C. License and permit revenue Another source of revenue for cities come from license and permit fees. Handbook, City Licensing. Cities should be conservative when estimating these amounts as they can vary considerably from year to year. Municipal licensing should not be viewed as a significant source of revenue. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 13 39 RELEVANT LINKS: In Minnesota, license fees must approximate the direct and indirect costs in issuing the license and policing the licensed activities. D. Intergovernmental revenue 1. Local government aid LMC website, LGA 101, For some cities, local government aid (LGA) from the state is a significant LMC website, History of source of income. The goal of LGA is to equalize cities' ability to provide Local Government Aid to an average level of services at reasonable property tax rates. Cities, A complex formula determines how much LGA each city receives. The LMC website, LGA Formula Key Points. Minnesota Department of Revenue certifies how much LGA each city receives by Aug. I of each year. Cities receive two annual LGA payments — LMC website, Dates for city Budgets 101. one in mid -July and the other at the end of December. Minn. Stat. § 477A.014. The commissioner of the Department of Revenue notifies each city of its Minnesota Department of LGA distribution during the first week of August. Cities have 60 days to Revenue: Local Government appeal the calculation or factors used in the computation. Special Aid (LGA) and Annexations, Boundary changes, or considerations apply for cities dealing with annexation or a change in the Changes in Form of form of city government. Government. 2. Market value homestead credit ended in 2011 The Legislature eliminated the market value homestead credit (MVHC) program effective for tax year 2012. The main problem with the program for cities had been that the state did not always reimburse the entire amount of the credit. Thus, cities did not receive the full amount they levied in a given year. The program was replaced by the homestead market value exclusion. 3. Homestead market value exclusion Minn. Stat. § 273.13, subd. The homestead market value exclusion (HMVE) program replaced the 35. MVHC program for taxes payable in 2012 and beyond. This means that Minnesota Department of what the city levies is what the city receives directly from property owners Revenue: Homestead Classification. (less any amount that property owners fail to pay). This law is effective for taxes payable in 2012 and thereafter. House Research: The In place of the MVHC program, homeowners will receive an exclusion of a Homestead Market Value Exclusion. portion of the estimated market value of their house from property taxes. The exclusion is computed in a manner similar to the market value homestead credit. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 14 40 RELEVANT LINKS: Minn. Stat. § 477B. Minn. Stat. § 477C. Minn. Stat. § 424A.08. Minn. Star. § 471.699. Handbook, Financial Reports, Accounting and Auditing. For forms, instructions and letters about both forms see Minnesota Revenue: Police State Aid (Use Form PA-1). Fire State Aid (Use Form FA- 1). 4. General state aid Cities in Minnesota receive a variety of shared revenues from the state. Amounts for each city are typically available from the Minnesota Department of Revenue on or before Aug. 1 of each year. Each of these programs has a separate policy goal, and, taken in combination, the programs and their impact on city finances can be confusing. The following sections describe these programs and their interaction with the city budget - setting process. a. Fire and police state aid —filing forms required The state determines which cities and independent nonprofit firefighting corporations qualify for fire state aid directly —or qualify to receive fire state aid paid to the voluntary statewide lump -sum volunteer firefighter retirement plan. The state also determines which cities are qualified to receive police state aid. The state must pay the police and fire aid by Oct. 1, so the money usually goes out just before that deadline. However, cities must file the appropriate forms by March 15 each year to receive this money. In addition, the state auditor can delay the Oct. 1 payment date if a city fails to submit legally required financial reports. The city clerk in the city served by the volunteer relief association must also countersign the fire relief association's financial report — or it may be countersigned by the city clerk in the largest city served by the fire relief association. According to the Minnesota Department of Revenue, if the forms are not received by March 1 the Department of Revenue will send a final reminder stating that the forms have not been received and that the fire or police department could forfeit part or all its aid for the year if the forms are not received by March 15. The amount of aid forfeited is equal to the amount of yearly aid multiplied by 10 percent for each week or fraction of a week that the form is late. Please note: the police state aid form must be signed and dated by the city clerk. If the form is not signed and dated, the form will be returned. Please also note that the fire state aid form must be signed and dated by either the municipal clerk (or secretary of an independent nonprofit firefighting corporation) and the fire chief. If the form does not contain both signatures, the form will be returned. Funding for these programs comes from the state general fund, based on taxes paid to the state by most insurers writing homeowners, fire, and commercial non -liability policies. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 15 41 RELEVANT LINKS: The state apportions the money to qualifying cities for fire and police pensions. If all the police officers in the city police department are members of the PERA Police and Fire Fund, the state peace officer aid must be applied toward the city's employer contribution to the Police and Fire Fund of PERA. If there is no firefighters' relief association and the city is not a member of the statewide volunteer firefighter retirement plan (SVFRP), then the fire aid must be used to maintain the fire department. Minn. Stat. § 424A.02, subd. City councils preparing budgets should know that there is a penalty if a 3a. Minn. Stat. § 424A.02, subs. defined benefit relief association pays out service pension benefits in excess 10• of the statutory limits. This penalty includes the possible loss of fire state aid Office of the State Auditor for the city. In addition, city councils should note that volunteer firefighter 525 Park Street - suite 500, relief associations associated with the city fire department must file a copy St. Paul, MN 55103 (651) 296-2551. of revised bylaws with the state auditor whenever they are amended or when the city council approves any amendment to the relief association's governing bylaws. Failure to file revised bylaws may also result in a loss of state aid until such documents have been filed. b. Highway user tax distribution fund Minn. const. Art. 14. The Minnesota Constitution requires that state gasoline taxes and motor Minn. Stat. § 162.09. vehicle registration fees provide funding for certain city, county, and state roads. These revenues go into the highway user tax distribution fund Minn. Stat. § 162.05. (HUTDF), and the Minnesota Department of Transportation (MnDOT) Minn. Stat. § 162.11. distributes them. Twenty-nine percent of the fund is dedicated for certain county roads and highways. Nine percent goes to cities with populations over 5,000. The remaining 62 percent is dedicated to the state trunk highway system. Minn. Stat. § 161.081, subs. Pursuant to article 14, section five of the state constitution, 5 percent of the 1. net HUTDF is set aside for use on municipal and state roads. The 5 percent breaks down as follows: Minn. Stat. § 162.081. • 30.5 percent is devoted to the town road account. • 16 percent is devoted to the town bridge account, allowing townships to use funds in the town bridge account to pay 100 percent of bridge rehabilitation and replacement costs. • 53.5 percent is devoted to the flexible highway fund, to be used primarily to fund trunk highway turnbacks. Turnbacks are former trunk highways that the state relinquishes control of to another level of government, for example from state control to county responsibility. The flexible highway fund includes turnbacks of county highways in the computation of municipal state aid miles. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 16 42 RELEVANT LINKS: Minn. stat. § 161.081. The law also requires the Department of Transportation to consult with the League of Minnesota Cities and the Association of Minnesota Counties (AMC) regarding the distribution of the HUTDF flexible f ind's turnback money. City and county officials make recommendations on how to divide the fund between cities, counties, and the state regarding turnbacks. The commissioner of Transportation incorporates those recommendations in the department's biennial budget requests to the governor's office and the Legislature. E. Charges for services Cities may also receive revenues from election filing fees, sales of maps and ordinances, assessment searches, court fees, police patrol and fire service fees, street and sidewalk repair fees, parking fees, refuse collection, water and sewer charges, inspection fees, and service charges such as those made by libraries, museums, and recreation facilities. F. Public safety revenue Contact the POST Board for The state reimburses cities for some police officer training costs. The further information at (651) 643-3060 or reimbursement amount available for training and per officer depends on the postboard.agency.docs@State number of eligible officers and is not determined until all the applications .mn.us. have been received. The state determines the final amounts and transfers funds to cities in mid -September. G. Culture and recreation Cities may generate income from cultural or recreational activities. This may include money from park rentals or revenue from city sponsored programs such as swimming classes, city festivals and city parades. H. Enterprise funds Accounting Manual for small Enterprise funds come from city operations run in a manner similar to Cities and Towns in Minnesota. private businesses. Uniform chart of Accounts, Examples include water and sewer operations, municipal liquor stores and Office of the State Auditor. electric utilities. These services are typically funded by charging those who use the service. According to the state auditor, cities are required to report sewer operations as enterprise funds. I. Penalty charges City revenue also comes from penalties and fines such as court fines, confiscated deposits, and collections on bonds or surety held for enforcement or security purposes. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 17 43 RELEVANT LINKS: Though such revenue occurs, accounting for it in the city budget does not mean that cities plan on issuing a set number of penalties or fines. J. Special assessment revenue "Special Assessments" House Information Brief, Sept. Special assessments are a charge imposed on properties for a particular 2008. improvement that benefits the owners of those selected properties. The payments may continue coming in to the city for years and may be tied to bond payments for local infrastructure improvements such as improved water and sewer structures. K. Miscellaneous revenues According to the state auditor, miscellaneous revenues do not come from taxes, licenses and permits, intergovernmental revenues, charges for services, or fines and forfeits. Examples of miscellaneous revenues includes money from interest on investments, including such investments as savings accounts, certificates of deposit, money market funds and treasury bonds and bills, net increases in the fair market value of investments, rents and royalties such as revenues from rental of city properties (excluding city hall and community hall rent, parking lot fees, and auditorium use fees which are classified elsewhere) and contributions and donations from private agencies or persons. L. Other revenue An example of "other revenue" in this fund is cash received from insurance companies or individuals to compensate the city for the loss of general fixed assets due to theft, accident or natural disaster. Also included in this "other revenue" fund is interfund transfers (legally authorized transfers between revenue funds to expenditure funds). Examples include transfers from the general fund to a capital projects fund for authorized construction and transfers from an enterprise fund to the general fund to finance general fund expenditures. This fund also tracks money from the sale of general obligation bonds issued by the city. VII. Expenditures Cities must estimate their expected costs for the upcoming fiscal year and Excerpt from the Accounting budget accordingly. Common expenses across all categories of expenditures Manual for small Cities and include salaries and other employment costs, equipment, supplies, materials, Towns in Minnesota, Office of the state Auditor, June maintenance, repairs, training, and fuel costs. 2001 League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 18 44 RELEVANT LINKS: Many cities will have some activity in most of these seven categories and the first two categories (general government and public safety) make up the majority of city expenditures. A. General government Accounting Manual for small Expenditures under this category include general costs for the administration Cities and Towns in Minnesota. and finance of city government. Costs include those associated with council uniform chart of Accounts, activities, such as publishing ordinances, and meetings. This category Office of the State Auditor. includes all costs for holding general and special elections. Legal costs fit into this category as do salaries, wages, and related employee benefits such as employer contributions to retirement systems, insurance, sick leave and similar benefits for general fund employees. Minn. stat. § 415.11. City councils may temporarily reduce their own salaries for one year. The law allows a city council to enact an ordinance to take effect immediately and provides an automatic readjustment back up to the previous salary unless a city's ordinance specifies a different time. B. Public safety Minn. stat. § 626.8458. The basic costs of public safety, at service levels determined by the council, include police protection, fire protection, ambulance service, emergency preparedness, and some protective inspections. Cities should be sure to budget for public safety training costs. Training costs include statutorily required training, such as police -pursuit training and training requirements for part-time police officer licensure. Minn. star. § 424A.091. The city must provide for at least the minimum obligation to the fire relief "Municipal Contributions to Volunteer Fire Relief association in the annual municipal budget. The main sources of revenue for Associations," Office of the relief associations are municipal contributions, fire state aid, and investment State Auditor, Feb. 2009. earnings. Municipal contributions can be made voluntarily by a local community or may be required, based on the relief association's financial situation. Specifically, state law requires that a city pay a minimum annual contribution to the special fund of its affiliated fire relief association, unless the special fund is fully funded, or fire state aid is sufficient to cover the municipal obligation. Decreased earnings on investments generally mean higher required municipal contributions, which can create challenges for a municipality's budget. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 19 45 RELEVANT LINKS: Minn. Stat. § 471.70. Office of the State Auditor: Report of Outstanding Indebtedness (Excel spreadsheet format). Minn. Star. § 475.755. Minn. Stat. § 475.754. Minn. Stat. § 412.301. Minn. Stat. § 410.32. Minn. Stat. § 475.755. Minn. Stat. § 475.61. Handbook, Debt and Borrowing. Minn. Star. § 475.58, subd. 1(11). Minn. Stat. § 275.70, subd. 5 (2)• Minn. Stat. § 475.61. Minn. Star. § 412.301 Minn. Stat. § 410.32. Handbook, Debt and Borrowing. C. Culture -recreation Document all expenditures for city organized cultural and recreational activities. Examples include city expenditures for libraries, lifeguards, community centers, senior citizen centers, park supervision, park lighting and trails. D. Conservation of natural resources This category covers all expenditures for the conservation and development of natural resources, for example shade tree programs and the staff time taken to provide such programs. E. Debt service Cities have no authority to borrow money from banks or financial institutions. Instead, cities issue debt, or bonds, to finance public infrastructure improvements. Each year, councils and staff must keep track of the amount of debt issued, and payments of bond principal, interest and all associated costs. Cities must also document costs of issuing bonds and payments to fiscal agents working with a city on bonds in this category. Cities may budget for the use of certificates of indebtedness in a variety of circumstances. If the income of a city is reasonably expected to be reduced below the amount anticipated in its budget when the final property tax levy was certified, and those receipts are insufficient to meet the expenses incurred or to be incurred during the fiscal year, a city can issue certificates of indebtedness to mature within two years or less from the end of that fiscal year. The certificates must be repaid by a levy that, according to the Department of Revenue, is not subject to or included in a city's levy limit (if any levy limits are in place). The maximum amount the certificates may be issued for in a fiscal year is the expected reduction and the costs of issuance. Cities may issue short-term certificates of indebtedness to make up for an expected reduction in revenue from the amount the city was scheduled to receive when it certified and budgeted for its levy. Cities may issue certificates of indebtedness for capital equipment. These certificates are general obligations requiring the 105 percent over -levy and are subject to the debt limit, but none of the other provisions of bonding law applies. A reverse referendum procedure is contained in the statute if the amount of the certificates exceeds 0.25 percent of the estimated market value of taxable property in the city. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 20 46 RELEVANT LINKS: F. Miscellaneous expenditures Miscellaneous expenditures are those that do not fit in the other categories. Examples of miscellaneous expenditures may include costs to maintain a cemetery, airport, costs to settle legal claims against the city and costs related to enterprises like water and sewer that do not fit anywhere else. VIII.Capital improvements Minn. star. § 412.221. Budgeting for city infrastructure (roads, bridges, buildings etc.) covers more than one year so many cities separate these costs from yearly budgeting. Planning for future infrastructure costs is essential. A capital budgeting plan, sometimes referred to as a capital improvement plan or CIP, typically lists five or six years of major capital improvements, the order of priority, and a way to pay for them. A plan allows a city to save money for these projects. Priorities in the capital budget program remain tentative, and the council reviews them annually. Although capital improvement budgeting may appear cumbersome and unwieldy to small cities, this is not the case. A capital improvement plan provides protection to small cities, avoiding unforeseen infrastructure failures and expensive emergency repairs. IX. Other regulations impacting municipal budgets A number of state and federal regulations require certain types of reports and technical accounting strategies related to city budgets and city budgeting practices. A. GASB Governmental Accounting The Governmental Accounting Standards Board (GASB) issues statements Standards Board. Summaries of GASB that establish standards for accounting and financial reporting —or generally Statements. accepted accounting principles (GAAP)—for state and local governments throughout the United States. Reporting and Publishing In Minnesota, pursuant to state law, the state auditor enforces the accounting Requirements For Cities Reporting in Accordance With standards for cities. Specifically, the state auditor requires and enforces Generally Accepted compliance with GAAP for cities with populations of 2,500 and higher. Accounting Principles, Office of the State Auditor. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 21 47 RELEVANT LINKS: Minn. Stat. § 477A.017, subd. However, state law does not require that cities with populations under 2500 2. Reporting and Publishing report GAAP financial statements. These cities may prepare GAAP Requirements For cities statements as a good business practice or because of some contractual Reporting in Accordance with Generally Accepted requirement but are not required to do so by state statute. The state auditor Accounting Principles, Office provides a discussion on compliance with GASB 34 in small cities in the of the State Auditor. document, "Reporting and Publishing Requirements For Cities Reporting in Accordance with Generally Accepted Accounting Principle." This guidance should be used with the help of financial service providers to be best prepared to meet financial reporting requirements. See OSA; GASB; and GFOA. GASB 34 is lengthy and is not discussed in detail in this chapter. For further information on GASB 34, contact GASB, the Minnesota Office of the State Auditor, or the Government Finance Officers Association (GFOA). B. State auditor reports Handbook, Financial State law requires that cities file budget information with the state auditor's Reports, Accounting and Auditing. office and requires that cities publish budget information each year. A number of other financial reports and forms must be filed with the state auditor as explained in detail in Chapter 26 of the League's Handbook for Minnesota Cities. C. Taxation notification procedure Minn. Stat. § 275.065, subd. The law no longer uses the phrase "truth in taxation." However, many 3. Handbook, Property Tax people still use it to refer to a process which requires cities to allow time for Levy. public input on city budgets. According to the Department of Revenue, cities Minn. Star. § 275.065, subd. with populations of 500 or less and all special taxing districts (except the 1. Metropolitan Council, the Metropolitan Airports Commission, and the Metropolitan Mosquito Control Commission) are exempt from the requirement to hold a meeting with public input prior to adoption of the final levy. Note: Cities with populations of 500 or less must still certify proposed property tax levies to the county auditor on or before Sept. 30. And small cities must certify the final property tax levy to the county auditor Minn. Stat. § 275.065, subd. 3. by or before five working days after December 20 each year. If a city misses Minn. Star. § 275.066. this deadline, that city's final levy will stay the same as it was in the previous year. Cities over 500 in population, even with the smallest levy increase, must follow the process described below. The requirement for a city phone number and address on parcel specific notices sent out by the county auditor does not require listing a personal telephone number or personal address. If the city informs the auditor that it has no public office, then no phone number or address is included in the notices. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 22 48 RELEVANT LINKS: MN Dep't of Revenue: Truth in Taxation. Minn. Stat. § 275.065. Taxation Notification Summary Chart Date Actions On or Special taxing districts (EDAs, HRAs, port authorities, before etc.) must adopt any proposed property tax levy and certify Sept. the proposed levy to the county auditor 30. On or At one meeting, the city council adopts the proposed property before tax levy and announces the time and place of a future city Sept. council meeting at which the budget and levy will be discussed 30 and public input allowed, prior to final budget and levy determination. This public input meeting must occur after Nov. 24 and must start at or after 6 p.m. The time and place of the public input meeting must be included in the minutes, but newspaper publication of the minutes is not required. On or Cities must provide the county auditor with the following before information: Sept. 0 The time and place of the meeting at which the budget 30 and levy will be discussed, and public input allowed. (Again, meeting must occur after Nov. 24, and must not start before 6 p.m.) • A website address and phone number that city taxpayers may call if they have questions related to the auditor's property tax notice; this does not require listing a private phone number. • An address where comments will be received by mail; this does not require listing a private address. Nov. 11 County auditor prepares and sends parcel -specific notices. to Nov. 24 League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 23 49 RELEVANT LINKS: Minnesota Department of Revenue: Certificate of Compliance, (form TNT), Truth in Taxation. Minn. Stat. §§ 412.701 — 412.731. Minn. Stat. § 412.651, subd. 7. Handbook, Local Government in Minnesota. Nov. 25 City councils hold meeting(s) to discuss the budget and property to five tax levy and, before a final determination, allow public input. working days after Decemb er 20 Nov. 25 Cities must also file the certificate of compliance with the to five Department of Revenue within five working days of December working 20. days after Decemb er 20 *The dates listed reflect the dates established by statute. The Minnesota Department of Revenue uses the next business day if the statutory date falls on a weekend or holiday. As such, the calendar provided by Revenue may differ from the dates above. *Cities that are in overlapping counties or are consolidating services have slightly different timelines to certify proposed and final tax levies. X. Plan B cities Cities with the Plan B form of government must follow unique budgeting requirements in state law. In these cities, the city manager is responsible for the city budget and sets out the required budgeting structure. State law addresses citizen participation in budgeting, requires that the manager read the budget aloud and respond to council questions. As noted previously, once a Plan B city adopts a final budget, budget amendments require approval by a four -fifths vote of all members of the council. Consult the city attorney when voting on budget amendments in a Plan B city to ensure compliance with the law. XI. Charter cities Councils in charter cities must review any special requirements related to city budgets and work with staff and the city attorney to ensure that the requirements in charter and law are met. A number of city charters make the city manager responsible for city budgeting, but the council must still play a role in budget planning and approval. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 24 50 RELEVANT LINKS: City of Hopkins City Budget. XII. Conclusion Accurate and complete budgeting is crucial to a city. It provides sound legal, financial and ethical basis for city operations. Done correctly, a budget shows the revenues and expenditures necessary to provide the services and programs desired by the community. It reflects the goals, objectives, and priorities the current council identifies, based on input from previous council decisions, the residents and taxpayers. League of Minnesota Cities Handbook for Minnesota Cities 9/10/2024 Municipal Budgeting Chapter 20 1 Page 25 51