By Bruce Kimmel, Senior Municipal Advisor
and Brian Reilly, Senior Municipal Advisor | Managing Director

Planning, Flexibility, and Fiscal Sustainability

Local governments across the nation are facing mounting financial pressures. Rising costs for delivering municipal services, increasing costs to replace aging infrastructure, and growing community expectations have increasingly strained the fiscal sustainability of many communities, leaving them to wonder “What can we do to continue balancing the budget while maintaining service levels and driving critical programs or capital projects forward?”  The answer is unique to each municipality and finding it relies on three key elements.

1. Conduct long-term financial management planning
2. Explore alternative funding sources
3. Seek ways to reduce costs or lessen the impacts of future cost increases

Financial Management Planning

The foundation for long-term fiscal sustainability is the Financial Management Plan (FMP). An FMP is a multi‑year plan primarily developed for tax‑supported funds that integrates prior policy decisions, operating costs, capital improvement plans, existing and future debt, and anticipated changes to taxes and fees to forecast whether capital and operating expenditures are sustainable over time under various assumptions. Rather than serving as a static “snapshot in time” document, the FMP functions as a dynamic decision‑making tool that helps communities see the long‑term implications of policy choices and investment decisions before they are made. The FMP also helps:

• Transform community vision into an actionable project plan
• Identify funding sources for community priorities
• Communicate long-term goals to stakeholders
• Manage public expectations
• Communicate needs with potential funding partners

A core function of the FMP is to inform the annual budging process.  Rather than a standalone exercise, the budgeting process should incorporate a multi-year point of view and be an ongoing discussion between staff and elected officials, guided by the decision-making framework of the FMP.  When done well, the annual budgeting process becomes part of the overall FMP cycle, rather than an isolated single fiscal period exercise.

Perhaps most importantly, an FMP helps reduce reactivity. When financial and market pressures arise, communities with a clear plan are better positioned to respond objectively and strategically, understanding the probable impacts today’s decisions make on the future of their community.  Responding thoughtfully and decisively to unpredictable situations also helps inspire confidence in the ability of an organization to manage its financial affairs.

Alternative Funding Sources

While property taxes often represent the largest funding source for local governments, over- reliance on them can place undue pressure on tax levies and create fiscal vulnerability. By better diversifying municipal revenues, communities can help shift certain service and project costs away from property taxes, better match service costs to beneficiaries, and improve long‑term fiscal stability.

Some of the most common non-property tax revenue sources in Minnesota include public utility franchise fees and local option sales taxes.

Public Utility Franchise Fees

One of the most flexible funding sources is the public utility franchise fee. Under Minnesota law, cities may require private utilities operating within the public right-of-way or on public property to obtain a franchise and pay associated fees.  Generally applicable to electric and gas utilities, a franchise is most often a negotiated contract with the provider, which is subsequently adopted by the municipality as an ordinance. Franchise fee revenues may be used for any public purpose and are most often applied to streets, parks, sustainability efforts, and public facilities.

While franchise fees offer a higher degree of flexibility and the ability to generate revenue from tax‑exempt properties, they are also more regressive than property taxes and don’t have a state relief program.  Franchise fees are also less transparent for constituents because utilities most often pass them through to ratepayers as a separate fee on the customer bill.

Local Option Sales Taxes

Local Option Sales Taxes (LOST) provide another avenue for funding statutorily authorized projects. Authorized under Minnesota law, cities or counties may levy sales taxes to support up to five projects of “regional significance.” These projects are defined as a single building and the infrastructure needed to safely access it, improvements within a single park or named recreation area, or a contiguous trail.  Under LOST, sellers of applicable goods and services collect the sales tax, then remit it to the Minnesota Department of Revenue (DOR).  Those funds are then remitted back to the city or county on at least a quarterly basis.  The DOR also charges local governments an administrative fee for this service.

A key factor for municipalities to consider relative to LOST is the fairly cumbersome and uncertain authorization process.  To implement LOST in Minnesota, cities or counties must

1. Pass a local resolution detailing the tax rate (up to a maximum of __%), proposed projects and anticipated revenue
2. Submit the request to the state legislature for consideration and approval
3. File local approval with the Secretary of State
4. Hold a local referendum to seek approval from voters
5. Approve a local ordinance upon voter approval

Each of these steps contains very specific tasks and timelines for completion.

For Wisconsin communities, the calculus is a bit different under the current regime of levy limits.  The property tax levy supporting general fund operations is limited to the greater of percent net new construction or 0%, along with various pre-determined adjustments for specific events and allowable adjustments that may be temporary.

There are several options that can increase revenues or otherwise diversify those who pay for specific services:

Referendum Approval to Exceed the Allowable Levy

Local units of government can seek referendum approval to exceed their state-imposed allowable levy limit.  The ability to do so is governed by a very specific process.  Referendum-approved levy authority can be for a limited period of time, such as a year or number of years, or permanently.  Both scenarios are limited to a specific dollar amount and for stated purposes approved by voters.

We recommend starting this journey as early as possible in order to comply with law and undertake the financial planning and community outreach necessary to be successful.

Transitioning Levy-supported Services to Fee-based Structures

In order to gain stronger financial flexibility and sustainability, many jurisdictions have transitioned from levy-supported functions to fee-based services.  It’s imperative that the proper approach is taken to establishing the fee to ensure it is legally valid and equitably applied.

When levy-supported services are transitioned to fee-based, communities must determine if these are considered a “covered service” with respect to levy limitations.  These are things like garbage collection, snow plowing, storm water, street sweeping, and fire protection that is unrelated to the “production, storage, sale, delivery or furnishing of water for public fire protection purposes.”  The costs for those aspects of fire protection can be moved to water bills through a specific process prescribed by the Wisconsin Public Service Commission.

If a covered service is moved from levy-supported to fee-based, the jurisdiction must take a “negative adjustment,” or permanent deduction, to its allowable levy in the amount of funding coming from the tax levy for that service dating to the budget for the 2014 fiscal year (levy 2013 for the 2014 fiscal year).  In practical terms, the levy is reduced, but the implemented user-fee will likely generate more revenue than the amount of the levy funding the 2014 service cost, resulting in higher net revenue.  This allows the jurisdiction to meet the current cost of the service, while also spreading that cost over all those that benefit rather than only property-tax payers.  Additionally, the user-fee is not constrained by any statutorily imposed limitations, so the fee can be adjusted to keep pace with the costs of the service, going forward.  You lose levy authority, but pivot to what could be considered a more equitable distribution of the cost with stronger financial flexibility going forward.

This exercise can take the better part of a fiscal year to plan, message, execute, and implement.  The calendar should allow sufficient time to put your team in place (which will likely include one or more consultants), engage with the governing body, craft your public messaging, and allow your staff to build the necessary billing and accounting infrastructure.

Capital Financing through Borrowing

Communities can finance capital costs in various ways.  This includes deploying reserves periodically, budgeting on a pay-as-you basis through annual capital outlays and issuing debt to spread capital costs over the period of time the asset is in place and used.

Debt shouldn’t be viewed as a four-letter word.  When planned well and issued prudently, debt can help municipalities achieve their short-, medium- and long-term goals, while smoothing out tax- or ratepayer impacts for project spending.

To finance medium-term initiatives such as vehicles, computers, and specialized equipment, options may include:

• Equipment Certificates: Authorized by Minnesota law, local governments may issue debt to finance essential equipment (public safety, road maintenance, and technology) with a useful life matching the term of the certificate.
• Lease-Purchase Agreements: Municipalities can enter into these agreements with lease providers for equipment purchases whereby they can often purchase the asset at the end of the agreement term for a nominal fee.
• Interfund Loans: Municipalities or development authorities may temporarily loan money from one fund to another to finance an initiative. These loans must be authorized and well-documented, specify a maximum term and interest rate. They may also carry certain reporting requirements.  It is important to understand your jurisdiction’s liquidity profile and the wherewithal of the fund receiving the loan to repay before contemplating this option

Long-term Borrowing

Long-lived assets should be financed with debt that is amortized over the useful life of the asset.  This limits total interest cost, meets requirements related to the tax-exempt status of the debt, and builds generational equity with respect to those who pay for the asset over its life.

Communities are often faced with capital financing decisions that exceed their ability to cash fund those projects or otherwise present the dilemma of saving enough before executing on a project.  Also, the funds accumulated during the saving period may come from those who may never use/enjoy the asset while in service.

Capital financing through the issuance of debt should take a holistic view.  There are limitations on certain forms of debt under statute by way of both maximum dollar amount and/or the levy associated with paying the debt service.  Care should be exercised when considering the long-term needs of your community.

Additionally, capital planning can identify moments in time where debt can be issued with minimal or no tax or rate-payer impact as prior debt declines or falls off.  New debt can also be structured in a manner that provides future debt capacity, knowing there will be additional needs for your community.  Your municipal advisor can assist in this forward-looking exercise and speak to the considerations of various debt structures, payment impacts, and any potential ratings factors.

Every funding decision shifts costs across the community, and fairness matters. By thinking creatively, diversifying revenues, and committing to transparent, long‑range planning, local governments can better position themselves to meet future challenges while maintaining public trust.  As always, Ehlers’ Municipal Advisors and Fiscal Consultants can help you create a plan that works best for your community.

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