Dollars and Nonsense
Last month at the headquarters of the Minnesota Bureau of Criminal Apprehension, St. Paul Mayor Randy Kelly announced his proposed 2006 budget. The speech was notable because the conservative Democrat--facing a tough reelection bid this year--recommended raising the city's property tax levy by 3 percent. If enacted, this would be the first time that property taxes have been raised in St. Paul in a dozen years.
But a closer inspection of Kelly's budget shows that the 3 percent increase is not nearly sufficient to cover the city's budgetary needs. Instead, the mayor's budget relies on a series of onetime cash infusions and dubious accounting practices to pump up the revenue and defray any tough fiscal decisions until 2007--by which time he hopes to be safely ensconced in a second term.
Perhaps most notably, Kelly proposes taking $1.15 million in fees collected by the License Inspections and Environmental Protection division and dumping it into the general fund. This money includes funds generated by construction permits, plan examination licenses, and certificates of occupancy.
The practice raises questions not only because it's a short-term patch that will leave a gap in future years, but also because it could be outright illegal. State statutes explicitly declare--in several different ways--that any fees charged by government must be proportionate to the service rendered. One such statute, for instance, requires that a municipality "adopt management and accounting procedures to ensure that fees are maintained and used only for the purpose for which they are collected."
But in recent years, as state aid has been gutted and the no-new-taxes mantra has proliferated, all levels of government have become increasingly reliant on fees. Gov. Pawlenty's recently enacted "health impact fee" on tobacco products is only the most notorious example of the practice.
Practices similar to what Kelly is proposing have landed other municipalities in court in recent years. Both Elk River and Shakopee have been sued by various builders' associations for allegedly violating state law by using revenue from building permit fees to fund other services. In Shakopee, for instance, the Builders Association of the Twin Cities and the Builders Association of Minnesota allege that the city has illegally funneled such fees toward the construction of a new library, a new police station, and a new public works building.
Both lawsuits, filed in state court, are currently in settlement negotiations. Because of those ongoing discussions, Joseph Springer, the attorney representing the building associations in both cases, declined to comment specifically on the cases. But he says that the questionable use of fees goes well beyond just Elk River and Shakopee.
"It seems that taxes are a dirty word but user fees are a good word," Springer notes. "The difference is that user fees are only supposed to defray a cost. They can't be making a profit off of these user fees. If that's what Mayor Kelly proposes, he needs to talk to his city attorney."
Springer is not alone in this assessment. Ron Nienaber, a veteran building inspector with Maple Grove and a former chairman of the International Conference of Building Officials, echoes Springer's comments. "I believe that's against state statute," he says of the Kelly proposal. "Our business is a fee for service." Nienaber says raids on building permit fees are not a new phenomenon. "They say, 'Well, we haven't had any buildings fall down, we'll just take that inspector away and use that money elsewhere,'" he notes.
City finance director Matt Smith defends the practice. He says that city officials are aware of potential legal problems, but describes St. Paul's fund shifting as "much more limited" than that in Elk River or Shakopee. Smith further maintains that many costs associated with development have previously been paid for out of the general fund, such as fire inspections and traffic planning.
This is far from the only question about Kelly's proposed budget. Last week the City Council voted--by a slim 5-4 margin--to increase the city's property tax levy for 2006 by 5 percent. That's 2 percent more than Kelly has proposed, a difference of roughly $1.2 million.
The chief concern expressed by the council majority is that Kelly's recommended budget relies heavily on onetime revenue sources and consequently will set the city up for a financial mess in 2007. For instance, Kelly proposes tapping $3.3 million from excess fund balances for various departments. Obviously these rainy-day funds will no longer be available as a resource in 2007.
A recent study completed by the city's Council Research office found that to keep up with existing costs, the city would need to raise property taxes by 21 percent in 2007 even with Kelly's increase this year. Even if there was another 3 percent increase in the tax levy in 2007, the study found that St. Paul would still face a $12 million shortfall.
These figures don't even take into account additional costs that Kelly has proposed for 2006, such as adding 25 new police officers to the force to the tune of $1.9 million a year. When these new proposals are accounted for, the projected funding gap for 2007 balloons to nearly $17 million, according to the council research study.
City Council President Kathy Lantry compares the mayor's fiscal logic to "winning the lottery" and then setting the household budget on the assumption that you will win the lottery each and every month henceforth. "That's exactly what he's done," she says.
The mayor's office pooh-poohs such talk. "We've faced gaps every year that the mayor's been in office and every year we've been able to close those gaps," says Kelly spokesman Carl Kuhl. "For the council to say, 'We want to take an extra 2 percent and hold on to it for 2007,' we think is irresponsible."
So, Kelly has vowed to veto any property tax increase greater than 3 percent. Given that it takes at least six City Council votes to override his veto, the prospects of that happening when the council votes to set the levy this week are extremely slight. This means that property taxes will increase by no more than 3 percent--and that Kelly's budget chicanery will be grudgingly accepted. "We're not going to have any choice but to accept it," concedes Lantry. "It is what it is."
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