Minnesota Cities Magazine

Ask LMC: Help! I’m Confused About Property Taxes

Property Taxes
Q: I am a new city clerk. In preparing for my first budget and levy season, I am confused about tax capacity and market value. Can you explain the difference between the two?

Money MazeLMC: Minnesota’s property tax system is very complex, and the concept of tax capacity is actually unique to our state. Market value is the dollar value that the local assessor thinks the property could sell for. It is calculated looking at recent sales, comparable properties in the community, and data on property features like number of rooms. For example, a home might have an assessed market value of $150,000. Most property taxes, however, are not calculated based on the market value, but instead on the tax capacity of the property. Tax capacity is the taxable portion of market value. The state Legislature determines the taxable portion of different kinds of property through the classification system. For example, a home valued at less than $500,000 has a classification rate of 1 percent, meaning 1 percent of the market value is taxable. Applying that rate to the market value yields tax capacity. With our $150,000 home example, its tax capacity is .01 x $150,000—or $1,500. The property taxes are calculated using that $1,500 figure. For more information, see the League documents under “Property tax resources” (near the bottom of the page) at www.lmc.org/property-tax.

Council Salaries
Q: How do we change the salaries of our mayor and city councilmembers?

LMC: Reasonable compensation for the mayor and councilmembers must be set by ordinance. In cities of the second, third, and fourth class, no change in salary can take effect until after the next regular municipal election. For many cities, the next election will be in November, so now is a good time for the council to consider a change and amend the salary ordinance.

While less commonly considered, city councils do have the authority to temporarily reduce their salaries by ordinance. A salary reduction can take effect immediately and lasts 12 months or as long as specified by the ordinance. After the expiration of the temporary salary reduction ordinance, the council’s salary returns to the compensation being paid prior to the ordinance being approved. For more information, see page 24 of the League’s Handbook for Minnesota Cities, Chapter 6 at www.lmc.org/handbook_ch6.

Health Care Reform
Q: We have between 50 and 99 full-time employees (including full-time equivalents). Will we have to do anything in order to qualify for the Affordable Care Act delay until 2016 for the employer shared responsibility mandate?

LMC: Yes, your city must meet these three conditions:

  • During the period beginning Feb. 9, 2014, and ending on Dec. 31, 2014, you cannot reduce the size of your workforce or the overall hours of service of your employees solely to satisfy the condition of having between 50 and 99 full-time equivalent employees.
  • You cannot eliminate or materially reduce the health coverage, if any, you offered as of Feb. 9, 2014, during either a.) the period beginning on Feb. 9, 2014, and ending on Dec. 31, 2015, if you have a calendar year plan; or b) the period beginning on Feb. 9, 2014, and ending on the last day of the plan year that begins in 2015 if you have a non-calendar year plan.
  • You certify on a prescribed form (to be issued at a later date) that you meet these eligibility requirements. For more information, visit www.lmc.org/hcreform.

Fire Relief Associations
Q: If our fire relief association joins the Statewide Volunteer Firefighter Retirement Plan to administer our pension plan, can we still have a relief association? Can we have a general fund to manage donations and fundraisers?

LMC: The Office of the State Auditor (OSA) has issued guidance on this topic. Even after joining the Statewide Volunteer Firefighter Retirement Plan for pension administration, a fire relief association can continue to operate as a nonprofit corporation. It will need to change both its board structure and bylaws to do so. Read the OSA statement of position on this issue at http://bit.ly/1n1rMWP. For information on joining the statewide plan for pension administration, visit the Public Employees Retirement Association website at http://bit.ly/1g9514p.

Got questions for LMC? Send your questions to choffacker@lmc.org

Read the July-August 2014 issue of Minnesota Cities Magazine

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