By Schane Rudlang, Municipal Advisor,
Jeanne Vogt, Senior Fiscal Consultant
and Robin Roland, Senior Fiscal Consultant

Budget & Levy Basics, Timelines & Mechanics

We are right in the heart of tax levy season so once again, it’s time to cover the basics of the budget and levy process, delve into some of the finer details of levy mechanics, and provide some best practices for maintaining healthy finances. While we specifically mention “cities” in our narrative, this information also applies to counties, school districts, and other taxing jurisdictions.

Budget & Levy Basics

Cities need money to operate. They receive funding from multiple sources to fund various activities. Some public services, like providing potable water for a community, are run like a business using enterprise funds. A water fund is an example of an enterprise fund where revenues are received from water sales to fund operations and maintenance connected with providing water. Enterprise funds generally pay for themselves with their respective user fees. Other services, such as police services, parks, and snow plowing, are funded by the General Fund budget. Once a city determines how much it will need to spend on General Fund activities, pay for existing or proposed borrowing, and set aside for reserves, it will set an annual budget to be supported by the property tax levy. The levy is typically the total budget less other available revenues, and is spread over the properties in the taxing jurisdiction.  Property owners pay their taxes twice a year, which fill the city’s coffers to be used for budgeted expenditures.

City budgets and levies have been increasing at a greater rate than the inflation rate typically reported in the news, the consumer price index (CPI. and personal consumption expenditures (PCE). This is due to two main factors: (1) inflation on construction, equipment, and labor are increasing at a higher rate than CPI and PCE, and (2) as cities grow, they need to levy more (more people means more snow to plow, more parks, and more police calls). Many Minnesota cities, big and small, are planning levy increases in the range of 5-15% for 2025. A levy increase does not always translate into higher taxes, however. If the city has grown, for example, a larger levy can be spread over a larger tax base, helping keep property tax bills (and tax rates) lower for individual taxpayers.

Levy Types, Timelines & Mechanics

The preliminary levy is adopted during September, but it’s a good idea to refer back to these important definitions and processes as you refine toward the final levy. Allowing time for the appropriate amount of engagement with members of city staff, the community, and elected and appointed officials is critical.

Property tax levies are broken down according to their purpose. The types of tax levies include:

1. Operations Levy – The operating portion of the tax levy is normally the largest component of a city’s General Fund revenues, and is typically used fund salaries, benefits, supplies, materials, equipment, and professional services for the coming year. Operations fund city departments such as: fire, police, public works, community services, parks and recreation, community development, administration/council, legal, and finance. The budget process should also incorporate non-property tax revenues the city can expect to collect, including other governmental funding (local government aid, police, fire aid, etc.), grants, permits and license fees, charges for services, investment income, and other miscellaneous revenue.

The difference between the total non-property tax revenues and the total expenditures usually equals the amount of the operating levy. However, the operating levy also needs to be large enough to incorporate a set-aside amount – a reserve – to manage the uneven revenues and expenses during the year. Property taxes are received only twice a year, and expenses can accumulate prior to and in between those payment dates. Reserves are also an important component for credit ratings. A General Fund reserve equal to 35% – 50% of the next year’s expected annual budgeted expenses is recommended.

Usually, the City Council has given guidance to city administration regarding expectations about increasing, maintaining, or decreasing the property tax levy as part of the budget process. The guidance could be a percentage aligned with the growth of the tax base or aligned with the rate of inflation, some other metric, or based on political considerations.

2. Debt Service Levy – Existing and planned debt payments can be financed with operational revenues, special assessments, and property tax levies. If revenue supported debt has a general obligation pledge (i.e., a property tax levy pledge), it is important to determine if the other funding sources will be sufficient to pay the debt. A projected shortfall in revenue will require a levy for all or part of the debt payment for the upcoming year. For example, if there is a large delinquent special assessment, the city may need to levy additional property taxes to make the full debt payment. Reviewing debt service funds is an important part of setting the debt levy.  In addition, Minnesota statute requires municipalities to levy 105% of scheduled debt service payments unless they have funds on hand to cover the additional 5%. Counties have an annual debt levy amount on record for each outstanding bond issue. If a city has funds on hand and wants to reduce the debt levy, it must be identified on the required County certification form with an explanation of the source of funding available to offset the reduction amount.

3. Additional levy amounts may be combined with the operating and debt levies, including EDA and HRA levies, capital or equipment funding and tax abatement levies, to get the total annual levy amount.

Certification of the preliminary property tax levy resolution must be conveyed to the respective County for each taxing jurisdiction on or before September 30.  This proposed levy is used to calculate the estimated property taxes for each parcel included in the Truth in Taxation statements mailed to property owners in November. The final levy must be adopted and certified to the County in December. The final levy may be the same or less than the September amount, but not more. Prior to final levy certification, the city must hold a Truth in Taxation hearing.

The Interplay Between Values & Levies

An increase in the total property tax levy does not necessarily mean an increase in the property taxes of individual property owners in the jurisdiction. Actual increases (or decreases) in the property tax owed for any given property are dependent on the property’s taxable value, and the change in the value of other properties in the taxing jurisdiction. For Pay 2025 a new Market Value Exclusion formula goes into effect, lowering the tax burden on modest-valued homes and shifting it to other property classifications. Additionally, higher interest rates and vacancies have restrained the values of some commercial properties, shifting the burden back to residential properties. This interplay of levies and values can most easily be conveyed to your constituents by showing the estimated tax impact on a median valued home or sample business.

Best Practices in Adopting Budgets & Setting Levies

• Communicate with property owners. It is vital during this process to help taxpayers understand what their property taxes are paying for and the value they receive from the property taxes they pay. Truth in Taxation meetings are a prescribed way to present this information, but certainly not the only way. Informational videos, websites or social media posts offer other opportunities to involve and inform residents. Many cities and counties already have FAQs and videos on their websites which can be a resource – don’t reinvent the wheel!
• Educate the public about how property taxes work. Be mindful of other levies including county, school, referendum, and other special taxing jurisdictions.
• Have a plan for your finances. Update your financial management plan, which is a long-term ‘budget’ for the city. If you don’t have a financial management plan, talk to an Ehlers Municipal Advisor.
• Start early with the budget and levy process. These steps can take time and ultimately inform the shape and future of your community!

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