Focus on New Laws: Levy Limits and Tax Hearing Changes

The 2013 legislative session resulted in levy limits and a new tax report requirement.
(Published Sep 3, 2013)

The 2013 omnibus tax bill (Chapter 143) included several new provisions that will impact the tax levy and budget-setting process this fall. Specifically, the tax bill included a one-year property tax levy limit for cities over 2,500 in population and for all counties. In addition, the tax bill included a provision tied to the new sales tax exemption that requires cities over 500 in population to provide either the actual or estimated sales taxes they paid to the state on city purchases in 2012.

Levy limit overview
Note that the 2014 levy limit is computed in a different manner than past levy limits and these changes have resulted in significant confusion among city and county officials. As a result, please disregard any past levy year limit calculation instructions. For most cities, the new levy limit law will result in a levy limit that is equal to either their 2012 or their 2013 total certified levy, whichever is greater. Although this may appear to be a levy freeze, keep in mind that “special levies” for debt service and other priority expenditures, are outside the levy limit. In other words, special levies are above and beyond the limited portion of the city’s levy.

Cities subject to the levy limit were officially notified of their 2014 levy limit by the Minnesota Department of Revenue (DOR) around Sept. 26.

What has changed?
The most significant difference in the calculation of the 2014 levy limit when compared to past levy limits is that a city’s final levy limit cannot be less than the greater of the city’s 2012 or 2013 certified property tax levy. The 2012 or 2013 certified levy includes levy amounts that would have been special levies had levy limits been in place. In the past, a city’s calculated levy limit could be significantly below the total amount levied in previous years due to the subtraction of allowable “special levies” for debt service and other priority purposes as well as for increases in LGA. Under these traditional levy limits, a city was then also authorized to levy above the limit for permissible special levies.

However, for 2014, the clause in the levy limit calculation that prevents the 2014 levy limit from being less than the greater of the city’s total 2012 or 2013 certified levies means that the city’s levy limit includes the amount of the previous year’s special levies AND then the city has the authority to add its 2014 special levies to that total. The table below provides a simple comparison of previous levy limits to this year’s levy limit.

Comparison of past levy limits to 2014 levy limit

The largest category of special levies for many cities is related to debt service and certificates of indebtedness. The Legislature authorizes these levies outside the levy limit to avoid having the levy limit affect the ability of the city to repay debt obligations, which could jeopardize municipal bond ratings and increase the cost of borrowing.

Although there are other special levies such as levies for natural disaster response, not all traditional special levies were permitted under this year’s levy limit. For example, in the past, cities have been allowed to declare levies related to pension contribution increases as special levies. However, the 2014 increase in the employer contribution for Public Employees Retirement Association (PERA)-covered police and firefighters (from 14.4 percent of salary to 15.3 percent of salary) or the potential 0.25 percent of salary increase in the PERA general plan employer contribution are not allowable special levies for 2014. (Read more about the PERA changes.)

The complete list of allowable special levies is included in the Department of Revenue levy limit instruction materials linked above. Cities will be required to submit information on special levies for 2014 to the Department of Revenue by Sept. 30. The DOR will be distributing a form to submit that information in the near future, and will notify cities of the allowable special levies by Dec. 10.

Certifying the 2014 proposed levy
This year, cities must certify their proposed 2014 total property tax levy by Sept. 16. The proposed levy is not only used to compute the proposed tax statements that will be sent to taxpayers in November but it also becomes an upper limit on the total levy that the city can ultimately impose when the levy is finalized in December. The final levy certified by a city in December can only be increased from the proposed levy for a limited list of items such as additional levies approved by voters after the proposed levy was certified. This includes debt levies, levies for tort judgments, natural disasters, emergency debt certificates, and unallotments of state aid.

Keep in mind that for the proposed levy that must be certified to the county by Sept. 16, the city should set the amount to reflect the total expected levy for 2014 without regard to the levy limitation discussed above. The levy limit only applies to non-special levies, but the preliminary levy certification should also include all necessary “special levies.” Failure to include all needed levies in the proposed levy certification will mean that the city’s final levy will be limited to the proposed levy amount.

Tax savings report
When the Legislature debated the omnibus tax bill, a provision was added that requires cities over 500 in population and all counties to compute the actual or estimated 2012 sales taxes paid to the state on purchases made by the city. This figure will be collected by the county along with the proposed 2014 property tax levy and distributed to taxpayers along with their parcel-specific preliminary tax notification form in November.

The intent of the law is to provide taxpayers with information on the potential benefits of the newly enacted sales tax exemption on city purchases. When the provision was first discussed in the Senate, the report would have required cities to provide actual sales taxes paid by the city and the report would have become an annual requirement filed in conjunction with the preliminary levy certification. League staff urged that the bill require either the actual sales taxes paid OR an estimate of sales taxes paid, and that the report only be made in the first year of the new exemption. Both of those suggestions were incorporated into the final tax bill.

Every affected city will then have to discuss at the hearing designated for public input the savings realized by the city due to the Legislature's decision to exempt many city and county purchases from the sales tax.

The DOR says it will be sending out information to assist cities with the calculation of the 2012 sales tax liability but, as of Sept. 2, there has been no guidance published. That said, the law does not provide any specific requirements on how the sales tax estimate is prepared.

Due to the fact that several counties have already required cities to submit a 2012 sales tax figure, some cities are taking their 2012 general fund budget, subtracting expenditures that clearly would not be subject to the sales tax, such as employee salaries and benefits, and then estimating the proportion of the remaining expenditures that could be potentially subject to the sales tax.

Assuming that the figure already includes sales taxes paid at a rate of 6.875 percent, that figure can be converted into an estimate of the sales taxes paid by multiplying the total taxable expenditures by .064328 (6.4328 percent) to yield an estimate of the amount of sales taxes paid by the city. A similar technique can be used for other funds, such as enterprise funds, even though those funds may not be supported by property taxes.

In addition to submitting to the county the actual or estimated sales taxes paid in 2012, each city over 500 in population will be required to discuss the savings with taxpayers at the fall budget hearing. At their fall 2013 truth-in-taxation meetings only, the county and each city over 500 in population must discuss the savings they expect in 2014 due to the new sales and use tax exemption. The session law refers to a “public hearing,” but according to the DOR, the requirement in Minnesota Statutes, section 275.065, subdivision 3, is for a “public meeting” and therefore, a formal hearing is not required.

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