Agenda - Council Work Session - 05/12/2020

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INTRODUCTION State of Road Financing in Minnesota State and local governments fund almost all of the costs associated with their road construction and maintenance projects, totaling $128 billion in 2016, 73% at all levels of government (Urban Institute, 2011). According to the Minnesota State Highway Investment Plan (MnSHIP), there are concerns over the next 20 years on funding shortfalls for road infrastructure within the state (American Society of Civil Engineers, 2018). MnSHIP estimates that these compounding factors will cause a $17.7 billion gap in underfunded roads throughout the state without new public investment (American Society of Civil Engineers, 2018). There are many benefits to establishing a proactive approach to road maintenance and reconstruction. Estimates suggest that for every $1 spent on road maintenance, $7 can be saved on repairs increasing the cost effectiveness of tax -payer dollars (League of Minnesota Cities, 2020). This is in part due to preventative maintenance routines reducing the need for expense repairs and reconstruction projects, prolonging street lifespans by 25-30 years. A proactive approach to road maintenance also has the potential to reduce user costs such as wear and tear on vehicles and traffic congestion delays (City of Ramsey, 2013b). To help local governments cover the high costs of maintaining roads, Minnesota uses the Municipal State Aid Street (MSAS) system to distribute transportation -related taxes to cities with populations of at least 5,000 (Minnesota House Research). Eligible cities may receive funding for up to 20 percent of their streets that have higher traffic volume, connect major points of interest, and provide an integrated and coordinated highway and street system (Minnesota Department of Transportation, 2020). On average, eligible cities receive $1.3 million ($48.6 per capita) from this fund annually (Minnesota Department of Transportation, 2020). Municipalities are on the hook for the remaining cost - nearly 84% - of street maintenance and reconstruction in Minnesota which they largely pay through property taxes and special assessments. While widely used, these two funding tools are not without their downsides. First, special assessments can be a burden on property owners and can be hard to implement and administer in some cities. And second, property taxes are not always reliable. When revenues are low and budgets need to be stretched, funding roads may not always make the priority list when considering other services that cities need to pay for through their general fund (ex: education, public health, public safety, and public works) (League of Minnesota Cities, 2020). General Mechanisms to Fund Municipal Roads There are two types of funds that cities can use to pay for general street improvements: general revenues and special revenues. Special revenues are funds that have been earmarked for a specific program or service, while general revenues can be used for unspecified purposes. Typically, cities fund their street maintenance and construction through their general revenues fund (Zhao, 2010). For most cities, property taxes make up the most significant portion of their general fund; however, there are other sources such as special assessments, franchise fees, local option sales tax, and capital improvement bonds (Table 1). Property taxes and special assessments are the largest and most common revenue sources in Minnesota (Zhao, 2010; League of Minnesota Cities, 2020).