Agenda - Council Work Session - 06/10/2014

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LEGISLATIVE UPDATES Despite an improving economy, the 2013 Legislature faced the familiar prospect of having to address a significant projected deficit in order to adopt a balanced budget for the next biennium. The November 2012 financial forecast projected a deficit of $1.1 billion in the state General Fund for the 2014 -2015 biennium, which was revised down to a $627 million deficit in the February 2013 forecast. Even with this challenge, there was an expectation that with one political party holding the Governor's office and majorities in both the House and Senate, this biennial budget agreement would be reached more quickly and easily than the previous one, which featured numerous vetoes, a special session, and the longest shutdown of non - essential state government services in Minnesota history. While in the end there was no special session or government shutdown, the 2013 session still stretched until the final day allowable under the state constitution, with the last bill passed at midnight. The following is a summary of recent legislative activity affecting the finances of Minnesota cities in 2013 and into the future: Local Government Aid (LGA) — The state -wide LGA appropriation for fiscal 2013 was set to increase about 2.8 percent to $426.4 million However, the 2012 Legislature froze 2013 LGA payments at 2012 levels for cities with a population of 5,000 or more. For cities with populations below 5,000, 2013 LGA was the greater of their 2012 aid or the amount they would have received for 2013 under existing law. The 2013 Legislature completely overhauled the LGA formula for fiscal year 2014 and thereafter, creating a three - tiered formula that includes separate "need factor" calculations for cities with populations under 2,500, between 2,500 and 10,000, or over 10,000. The new formula simplifies the LGA calculation, and is designed to reduce the volatility of the LGA distribution by limiting the amount it may decline in a given year. Under the new formula, each city's LGA distribution for 2014 will be no less than their 2013 LGA. Beginning in 2015, any reduction to a city's LGA distribution will be limited to the lesser of $10 per capita, or 5 percent of their previous year net tax levy. For cities that gain under the new formula, the increases will be distributed proportionate to their unmet need, as determined by the new "need factor" calculations. The state -wide LGA appropriation is $507.6 million for fiscal 2014, $509.1 million for 2015, and $511 6 million for fiscal 2016 and thereafter. Levy Limits — A levy limit for city property tax levies payable in 2014 was established for all cities with populations exceeding 2,500. The levy limit base is the certified levy (excluding special levies) plus the certified LGA for taxes payable in fiscal 2012 or 2013, whichever is greater, increased by 3 percent. The levy limit is equal to the base, less the city's certified LGA for fiscal 2014. Levies for special purposes such as debt service, abatements, or voter - approved purposes, are not subject to this limitation. Market Value Definitions — A number of levy, tax, spending, debt, and similar limits that had previously been computed based on "market value" or "taxable market value" must now be computed based on "estimated market value." This change was enacted to eliminate the effects of the homestead market value exclusion established in 2011. Levy Authority for Watershed Management Plan — Cites are granted the authority to levy taxes to provide funding for the implementation of a comprehensive watershed management plan. Tax Status of Leased Tax - Exempt Property — Tax - exempt property owned by a political subdivision and held under a lease for a term of at least one year, or under a contract for the purchase thereof, is considered to be the property of the person holding it for all purposes of taxation. This change makes the tax treatment of leased property owned by local governments consistent with leased property owned by the federal government. -16-