If Mayor Emily Larson has her way, Duluth residents will no longer be tapped to pay street fees on their monthly utility bills in the coming year, but they shouldn't expect a free ride.
Larson aims to shift the burden from a fee to local property taxes and pointed to a recent decision by the Minnesota Supreme Court that prompted her administration to reconsider the city's use of fees to fund street improvements and maintenance. The court ruled that the city of St. Paul's use of street fees actually constituted a tax and was subject to all the rules governing local taxation. Larson referred to the decision as "unambiguous" and said it also threw Duluth's use of street fees into question.
"While Duluth's street fee has differences from St. Paul, this ruling puts our current street funding at risk, and if continued, exposes Duluth taxpayers to potential liability," said Dave Montgomery, the city's chief administrative officer.
On Thursday Larson presented her budget proposal to the Duluth City Council and said her administration has strived to make the transition from one funding mechanism to another as transparent as possible.
"It is a very straightforward foundational budget, and the primary focus of it is to make the revenue-neutral switch from a fee to a tax," she said.
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As for the financial impact, Larson said: "Most homeowners will see a very minimal difference when you look at what they pay on the levy plus the fees now. For instance, the owner of a $160,000 home will save about $18 per year under this plan, and the owner of a $225,000 home will pay about $3 more per year."
Larson called her budget "Minnesota plaid and practical."
Besides the city's street fee being subject to potential legal challenge, Larson said it also requires annual approval by the Duluth City Council, introducing an element of uncertainty.
"Looking at the needs of our community, we really cannot build a long-term sustainable street plan based on an annual politically charged fee discussion," she said.
All told, Larson proposes to increase the city's property tax levy by 14.9 percent, with 12.9 percent of that total going to replace the street levy, which generates $2.8 million annually.
Larson said only 0.8 percent of the total levy represents new growth in spending, attributable primarily to city employees advancing up the pay scale with experience and higher-than-expected health insurance costs.
Wayne Parson, Duluth's chief financial officer, said health care coverage costs for 2017 came in at about double what the city had anticipated - jumping by about 8 percent, roughly $1.2 million more than this year.
Parson said that fortunately the growth in the value of taxable property in the city will increase by about 4 percent next year, due to new construction and financial appreciation, generating about another $1 million in property tax revenues for the city.
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To hold the line on expenses, Larson proposes that the city put off filling several open posts in 2017, including a communications and policy job in her own office. She figures the city can save $800,000 by temporarily holding the jobs open and said she anticipates no additional need for layoffs.
Another 1.2 percent of property tax revenues will go to service the city's outstanding debts under Larson's budget.
The city also proposes to triple the franchise fee it collects from Minnesota Power, pushing it from about $1 million to $3 million next year.
Montgomery said that would equate to about a 3 percent surcharge on Minnesota Power's bills in a state where franchise fees typically range from between 3 and 7 percent. He noted that 1984 was the last time Duluth adjusted its franchise fee.
Those franchise fees would be passed on to customers who now pay just a 1 percent charge. For a typical residential customer paying $50 per month for electricity, the change would bump the annual franchise fee expense from about $6 to $18 next year.
Larson was quick to acknowledge that the $2.8 million the city expects to collect for road improvements through her proposed levy hike falls far short of meeting Duluth's needs. The city once relied on about $6 million in annual casino revenues it received through an agreement with the Fond du Lac Band of Lake Superior Chippewa to fund streetwork, but those dollars have ceased to flow after federal regulators and the courts deemed the payments inappropriate.
Larson said she aims to gradually restore street funding to those previous levels but acknowledged it will take time.
"What we are doing is kind of building a foundation so that people can rely on the fact that we are building this back into our regular standard budgeting process," she said.
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Larson is the first to acknowledge the city could use some help.
"Certainly we need greater support from our state and federal partners. In the last two construction seasons, the state and the feds have provided funding for four miles of road construction. That's only 1 percent of our roads, because Duluth has more than 400 miles of road that need to be maintained," she said.
Montgomery contends Duluth must forge ahead, regardless.
"We'll still look to our partners, although we're not waiting for our partners," he said.
Montgomery noted that one of the advantages of charging a street fee versus a tax was that it touched all users of streets, including traditionally tax-exempt organizations.
By switching to a property tax which excludes these entities, Parson estimates the city will diminish its total collections by about 10 percent - a burden that will need to be shifted and shouldered by other taxpayers.
