State's Elimination of Property Tax Reduction Program Leaves Richfield with Less—Sort Of

As , in July 2011 the Minnesota Legislature eliminated the Market Value Homestead Credit (MVHC), a decision that—in combination with other state funding trends—could potentially force certain Richfield property owners to pay higher taxes. State funding for the MVHC program has diminished over the past several years and will be eliminated completely in 2012.

While no city wants to loose out on money, Richfield officials say they anticipated the loss and hopes to one day be rid of any local government aid (LGA) need.

The Program

Established in 2001, the MVHC program reduced many homeowners’ property taxes with a 0.4 percent reduction of the property tax owed, up to a maximum credit of $304 for a house valued at $76,000. Properties worth more than $413,778 were not eligible for the program.

Eligible residents could also apply to “homestead” certain properties—typically their primary residence, which could include a portion of apartment complexes if the owner occupied one of the units—and would receive some portion of the $304 credit. 

Funding Gaps

The program worked like this: because “homesteaded” property owners were paying less tax than the city’s property tax rate was originally set to collect, the MVHC program left a funding gap in cities’ budgets. To make up for the difference, the state made annual payments to reimburse cities, payments which were supposed to be equal to the lost property tax revenue. Cities received their full property tax levy while local property owners got some tax relief.

The problem was, the state rarely paid out the complete amount cities, including Richfield, expected to recoup. Local governments were often left with a considerable funding gap because of the MVHC program.

“This year, if the legislature hadn’t reduced it, we were supposed to get approximately $800,000, and we ended up getting about $99,000,” said . “We’re being shorted money that was actually due us.”

Of the $710,000 in MVHC funds due Richfield from the state in 2010, city finances show the state only paid out $99, 844. That funding remained flat in 2011, as Richfield was originally scheduled to receive $803,000, but will again only be receiving $99,844. State payments are scheduled to be made in October and December 2011.

“It’s been fairly evident to anyone who follows what happens in the State of Minnesota these past few years [that] just because the state certifies that you’ll get certain money, you can’t really count on it,” said . 

A History of Underfunding

The state has had trouble meeting its obligations to repay cities for lost MHVC revenues almost from the start.

While the state fully funded the program in 2002, the Legislature balanced a major budget deficit in 2003 in part by cutting remittances due to cities. The MHVC reimbursement amount in 2003 was supposed to be $85 million, while the state ended up remitting only $65 million to cities. In the ten years the MVHC program has been active, the state has remitted the full amount of MVHC funds to cities only twice, according to a fact sheet compiled by the League of Minnesota Cities.

Last year was the most severe year of cuts; with almost $82 million due cities, after “unallotment” by the Legislature and supplemental cuts, the state paid out only $11.6 million in MVHC funds.

“What the state is saying now is [effectively], ‘Because of our financial issues, we’re not going to remit that money to you,’” Regis said regarding the diminished payments in 2010 and 2011.

Richfield Officials Anticiapted the Loss of Funds

Regis and Devich both said that the city’s budget had begun to anticipate the state’s inability or unwillingness to make those and other aid payments. As a result the state’s diminished MVHC remittances in 2010 and 2011 hadn’t taken Richfield by surprise.

The diminished remittances were part of a larger pattern wherein state aid accounted for less and less of Richfield’s budget.

“I remember a time not that many years ago when LGA represented 25 percent of our revenues,” Devich said.

In 2001 LGA accounted for 24 percent of the city’s general fund revenues. In the 2011 budget, it made up just 2.79 percent of general fund revenues. Devich expected the downward trend would continue, seeing it as a plan by the state to wean local governments off of state aid entirely.

“By 2013, I don’t think we’re [Richfield] going to be dependent on LGA at all.”

Increase in Property Taxes?

While Devich and Regis both declined to speak about the impact state cuts may have on property taxes in Richfield, Devich said the city had already cut its staff and operating budget significantly in 2009 and 2010.

“Now we’re living with less,” said Devich. “I’m trying to get down to a point where I have a stable work force [at ] and we can still accomplish what we need to for the quality of life we want in Richfield.”

A budget meeting for the City of Richfield is currently scheduled for Sept. 7, 2011, although the date may change. Regis said Richfield’s 2012 budget must be approved by the Richfield City Council at its regular meeting set for Tuesday, Sept. 13. The city's 2012 budget is due to Hennepin County by Sept. 15, 2011.

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