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Tax exempt property in Bemidji causes budgeting issues

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BEMIDJI – Bemidji is often referred to as a regional center.

The Sanford Medical Center, Bemidji State University and the various county and federal agencies downtown act as large employers and contribute to the city’s sense of being a cultural and political focal point of the region.

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But there’s one thing they don’t offer the city: property tax revenues.

“It’s … good news, bad news,” said John Hagen, director of the property tax division at the Minnesota Department of Revenue. “You’re a center point for government and education, and a lot of people come and work there, but those aren’t paid taxes.”

More than half of the market value in Bemidji is exempt from property taxes, one of the highest levels in the state. Universities, public hospitals and government buildings are among the properties that are constitutionally exempt from taxes.

That makes budgeting and maintaining essential services a difficult task in the face of declining state aid.

In 2002, Local Government Aid accounted for 56 percent of the city’s budget while the property tax levy made up 17 percent. This year, LGA accounted for 30 percent of the budget, while property taxes made up 41 percent. Cities across the state have blamed cuts to LGA to rising property taxes, which make up about a third of the Bemidji’s general fund.

General fund dollars go to core services like police and fire, public works and general government expenses.

Declining state aid makes maintaining those services especially difficult in Bemidji, as the large amount of tax exempt property makes it hard to raise funds with property taxes alone, which could burden residents with large levy increases.

“We have limited tools to increase our revenue to fund the services we provide or maintain the services we provide,” said Ron Eischens, the city’s finance director.

The city does have other revenue streams outside property taxes. The gas and electric franchise fees, as well as the stormwater maintenance fee, are paid by everyone who uses those services in the city, regardless of their tax exempt status.

The city council is poised to raise the franchise fees 1 percent to 4.5 percent of monthly gross revenues, which is projected to raise $220,000 in additional revenue. That’s compared to the $40,000 that a 1 percent increase in the property tax levy would raise, Eischens said.

The city has set a preliminary property tax levy increase of 7.8 percent, with 5.4 percent of that increase needed to capture newly-annexed property and help maintain city tax rates. The remaining 2.4 percent of that increase is for budgetary needs.

If the city didn’t raise the franchise fees, the levy would have likely increased to about 13 percent, Eischens said. Though some of that is needed to capture annexed property and tax bills vary depending on a home’s value, the larger increase would have almost certainly been noticeable.

“When so much of your market value base is tax exempt, increasing property taxes is more and more difficult for the city because it’s more burdensome to the 50 percent of taxpayers in Bemidji that do pay (property) taxes,” Eischens said.

An anomaly

Article 10, section one of the Minnesota Constitution, states that “public burying grounds, public school houses, public hospitals, academies, colleges, universities, all seminaries of learning, all churches, church property, houses of worship, institutions of purely public charity, and public property used exclusively for any public purpose, shall be exempt from taxation except as provided in this section.”

Bemidji’s 52 percent of market value that’s exempt from property taxes ranks 15th highest in the state out of more than 850 cities, according to 2010 data provided by the League of Minnesota Cities. The average amount of tax exempt market value in a Minnesota city is 15 percent.

Only 12 other cities have more total exempt market value, three of which (Rochester, Duluth and Moorhead) are outside the metro area.

Some Bemidji staff members have appealed to state officials for help to mitigate their unique situation.

The current formula for how much a city gets in LGA uses a variety of factors to measure need and the ability to pay. But nowhere in the formula is the amount of tax-exempt property directly accounted for, Eischens said.

“We certainly have discussions with our legislators about it,” said City Manager John Chattin said. “Because we think that because of the tax exempt property we have there needs to be a Local Government Aid formula that addresses that.”

State lawmakers have also recently been debating the LGA system and potential reforms in a study group. But it’s unclear what, if any, changes will be made to the formula, considering the upcoming November election could change the face of the Legislature.

However, Gary Carlson, a lobbyist for the League of Minnesota Cities, said there seems to be a general understanding among legislators that tax exempt property affects cities’ ability to budget, and should be accounted for in the LGA formula.

“The general concept has intuitive appeal to people,” he said.

Going forward

For several years, the Bemidji Fire Department has considered changing its governance and financing structure as its contract with the Rural Fire Association inches toward expiring at the end of 2013.

The current system is funded primarily through property taxes, said Bemidji Fire Chief Dave Hoefer. But local officials are leaning toward using assessments based on a building’s value as the new entity’s funding mechanism. Those assessments would apply to tax exempt property.

“It’s all about being fair and equitable to everybody that’s the recipient of our services,” Hoefer said. “And ultimately some long-term financial stability for the organization.”

Details of the new joint entity are still being discussed, however, and special legislation may be needed to form it.

Meanwhile, more cities are looking at fee-based sources of revenue to support their budget, Carlson said. However, there are a limited amount of things a city can impose a fee for.

Additionally, the statutory limit on the gas and electric franchise fees is 5 percent of gross monthly revenues, meaning Bemidji won’t be able to rely on it in the future for much more additional revenue once the latest increase is approved. Chattin said in the long term, annexation and commercial development should help increase the city’s tax base.

“Being able to raise the revenue you need is always an issue,” Chattin said. “How that plays out down the road, I don’t know.”

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John Hageman
John Hageman covers local business and Grand Forks' legislative delegation. Get more business news at aroundtown.areavoices.com. 
(701) 780-1244
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