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Crow Wing County Board splits 3-2 on flat preliminary levy: No tax increases for 8th year

Crow Wing County commissioners listen as Finance Director Jason Rausch presents information concerning the 2018 preliminary property tax levy. Chelsey Perkins/Brainerd Dispatch

In a move the board chairman described Tuesday as cutting "into the bone," the Crow Wing County Board again maintained a flat property tax levy for 2018.

The 3-2 decision represents the eighth consecutive year the board passed a flat or reduced levy. Tuesday's resolution addressed the preliminary levy, with final certification expected in December. Once set, the levy cannot increase, although it can decrease. This guarantees the streak of not increasing the tax burden on property owners in Crow Wing County continues—at least for the county's portion.

But the decision goes against the recommendation by Finance Director Jason Rausch of at least a 2 percent increase for the second year running. It also means for the first time in at least 13 years, Crow Wing County will dip into its fund balances—akin to savings accounts—for ongoing expenses amounting to a projected $748,000. The county is expected to spend more than it receives in revenue, which means it will run an unbalanced budget in 2018 if projections remain on track.

The decision to keep the overall levy flat comes on the heels of months of discussions concerning a depleted fund balance in community services. That department has run over-budget at an average of $1.6 million each of the last three years. Pressures on that budget are attributed to dramatic increases in costs associated with out-of-home placements of children in the county, along with costs of providing mental health care through state-operated services.

Behind the numbers

To support rising costs, a nearly 20 percent increase in levy funding for community services is included in the 2018 budget. This amounts to an infusion of $1.4 million in taxpayer dollars into the department's budget, and was the largest change in funding made for next year. That increase is on top of a $3 million transfer from the general fund to community services to cover past years' expenses, approved in the levy resolution Tuesday.

Community services also requested three additional full-time staff members, all of whom would be assigned to the probation department. Two full-time staff members will be added to the sheriff's office, and as part of the settlement of a lawsuit sought by County Attorney Don Ryan, an additional county attorney will join the office in 2018.

So what budget changes were made to achieve a levy with no increase? Two areas represent the vast majority—a $965,000 reduction in levy funding for capital projects, used to update buildings and equipment, and a $748,000 transfer from the highway department fund to the general fund, to be applied to ongoing expenses. Rausch explained with future capital projects slated for about $4 million, additional funding would have to be found to cover those.

Rausch said he anticipated two of the county's funds would be below the minimum balance recommended by the Office of the State Auditor in 2018—the community services fund, which was already well below that level, and the general fund, dipping below the recommended 35 percent of the budget with the anticipated expenditures.

Houge, Nystrom express concerns

Chairman Doug Houge pointed out allowing these funds to fall below the recommended minimum balances goes against a policy the board adopted in July.

"How do we rebuild those funds?" Houge asked. "It's a concerning one for me, that we're going to be digging a hole that is going to take a lot of work to get out of."

Rausch said there are three ways to add to those funds—to increase revenues, reduce expenditures or to levy dollars specifically designated to the fund balances.

"What would be options, when you said revenue?" asked Commissioner Rachel Reabe Nystrom. "Go door to door selling candy bars or something?"

Rausch said as far as non-levy sources of revenue, the two major options are increasing permitting costs and other fees, or seeking non-levy revenue from sources like a contract to house Minnesota Department of Corrections prisoners. The county did this for its 2016 budget, agreeing to open an additional housing unit in the jail to accommodate additional state prisoners.

"I do think that some of those options are off the table," Rausch said. "We don't have any more beds in order to create any more revenue in that area."

Rausch said on the expenditure side, the county's kept it "pretty tight," managing very small growth for an $86 million organization.

"I believe that we're getting close to the point where it's a reduction of services or reducing the level we are providing of services," Rausch said.

Nystrom asked Rausch whether it was realistic for the board to continue with no increases to its levy. Rausch responded it's the board's decision.

"How close to the bone are we?" Nystrom asked.

"I feel we're very close to the bone," Rausch responded. "I think we are doing the services to the best of the ability with the staff that we have. ... I don't know how much tighter that we can run, in my personal opinion."

Commissioner Paul Koering addressed the audience, made up of a number of department heads and staff members.

"I know that everybody is working super duper hard here, and I appreciate you," Koering said. "I did make a point in the committee of the whole that we can never have enough staff if any emergency happens. ... We can never have enough people standing in one room ready to deploy to take care of all of these problems."

Koering said the county would provide services to the best of its ability, likening this promise to an oath of office an elected official takes.

"We're making a big decision here today, and I'm doing it to the best of my ability and what I think is right for the people that voted me in, and I know the staff is doing the same thing," Koering said.

Rausch explained spending $750,000 more than revenues would lead to a compounding problem in 2019, coupled with an expected increase of $1.5 million in expenditures as a general baseline for the organization.

"Finances are not my things, but I can't understand—why are we trumpeting that we're doing a zero budget when we're borrowing from ourselves?" Nystrom said. "That doesn't make sense to me. It's great to say, 'Oh, it's a zero budget,' but we borrowed $700,000."

Rausch said to avoid the spend down, a levy increase of about 2 percent would cover it.

"That would be good, and it would be honest," Nystrom said.

Thiede pushes back

Commissioner Paul Thiede said it was the county board's duty to set where the county is headed, and the budget committee recommended the flat levy. A quorum of the county board sits on the budget committee, the same three commissioners who ultimately voted in support of the levy resolution—Thiede, Koering and Commissioner Rosemary Franzen.

"To the particular usage of fund balances, I think it is again grossly overstating that we've never done this before," Thiede said. "I've been on this board a lot of years, and we have borrowed from fund balances to pay other things numerous times in the past."

Thiede likened the use of fund balance to dipping into one's own savings account during the Great Recession. He said other agencies—i.e., the state—were making decisions about what fund balances in the county ought to be, and this year presented an opportunity to re-examine a zero-based budgeting process. Thiede has long championed this method of setting a budget, which means rather than basing a year's budget on the previous year's, each department must build a budget from zero.

"I have no fear of us saying we're going to spend some of our fund balance," Thiede said. "I agree with Jason when he says the next year we're going to have to decide whether or not we backfill that ($748,000). ... I think that's going to be a great discussion."

Nystrom asked for other commissioners' opinions.

"Personally, I would not operate my own finances this way," Houge said.

Houge said storm damage experienced by the county over the past couple years showed the importance of having emergency funds, and he was not in favor of departing from the board's own policies concerning fund balance minimums.

"I think we've actually cut into the bone, and it's just too deep," Houge said. "I know that we've rode a nice little seven-year wave here of zero. ... I think we're at a point where we have to make a tough decision, and that may be a small increase."

Thiede said the fund balance policy was a guideline, not a rule.

"This is nothing more than a policy that we can deviate from at any time," Thiede said.

Thiede said he was not afraid of the risk, and he didn't think the county would be in any more of a crisis than any other government in an emergency situation.

Rausch asked whether he was allowed to discuss long-term financial planning options he'd presented to the budget committee. Thiede told him it was public information.

"You put it out there, Jason, defend it," Thiede said.

Rausch explained his recommendation would have the board increasing the levy by 2 percent each of the next four years, followed by a 4 percent increase over the next four years. This includes the $5 million in debt service payments the county will no longer be required to make in 2020, which Rausch said could be used to stabilize levy increases.

Rausch also laid out a plan showing what three more years of no increases would mean for the county's finances. In all, Rausch said this would lead to an estimated $3.4 million deficit below the recommended minimums of the funds.

Rausch countered some of Thiede's comments, noting borrowing from fund balances in the past was for one-time expenses, not ongoing ones. He added he agreed with the state auditor's recommendation for the general fund balance, believing it worked well for Crow Wing County. He explained between January and June, the county spent enough from that fund, which was at the recommended level of $9.3 million, to have just $500,000 remaining for any unexpected expenses. The county uses those dollars to cover operating costs until property tax dollars and other forms of revenue are captured.

"If that $500,000 were reached, and we had a disaster that we had to come up with $2.5 million, where would you go?" Thiede asked.

"I would call some of our investments from Bremer (Bank)," Rausch said.

Thiede asked what the balance of those investments are. After looking it up, Rausch said the county has $40 million invested, much of which is "very restrictive."

"In an emergency, that could be tapped on a short-term basis," Thiede said, adding expenses would come along with that to withdraw and return the money.

"I'm not arguing against a good financial management plan," Thiede said. "I just have a different risk aversion than Jason does."

"Agreed," Rausch responded.

According to a list of the county's revenues, interest collected from the county's investments is expected to generate $820,000 for the county in 2018. Removing funds from investments for emergency purposes would lead to a decrease in interest revenue, creating a wider gap between expenses and revenues.

Nystrom asked County Administrator Tim Houle to weigh in.

"Do you have a question?" Houle responded.

"If you were on the board, what would you do?" Nystrom asked.

"I'm not," Houle said. "This is the board's prerogative. It is a policy choice about what levels you wish to allow the fund balances to go to."

Board's closing thoughts

After Koering made a motion to approve the preliminary levy and Thiede seconded, Houge reiterated his opposition.

"I spoke to a few of our senior management, and a majority if not all are fairly uncomfortable," Houge said. "I have heard more negative comments toward the zero levy (from constituents) than I have an increase. ... I do think there's a majority of taxpayers who probably felt we've cut too deep as well."

Nystrom read from an email she said she received 10 minutes earlier from a taxpayer, questioning the board's actions.

"I personally like to deal in authenticity," Nystrom quoted. "A continued zero levy feels like smoke and mirrors."

Commissioners looked toward Franzen, who other than contributing a few comments during the discussion concerning full-time employees, did not speak throughout the presentation. Franzen remained silent.

The motion passed 3-2, with Houge and Nystrom opposed.

More on alternatives, taxpayer impact

During a follow-up interview with Rausch, he explained in more detail some of the alternatives presented to the budget committee. One option suggesting numerous cuts—including the elimination of the 4-H program and appropriations for a variety of entities—showed a flat levy would still require nearly $700,000 transferred from the highway fund to the general fund to pay for expected expenditures. This option would also not reduce funding for future building and equipment improvements, as the approved resolution did.

Rausch also prepared information concerning the tax impact on individual property owners, if the board adopted his recommended 2 percent increase.

A homestead property in Brainerd with an average value of $101,200 was taxed $327 in 2017. With no value change, a 2 percent increase would be less than a dollar. With an expected value change of 1.94 percent, that property owner's taxes would increase $7.

A seasonal property in Crosslake with a value of $376,500 would see an increase of $1 with no value change, or $25 with the projected value increase. A commercial or industrial property in Baxter, valued at $1,063,100, would see a $4 increase in taxes with no value change, or $138 with the expected increase in value.

Rausch said it was ultimately up to the board to set these policies, although he noted he would not recommend continuing flat levies from a financial standpoint.

"If they don't want to have a fund balance minimum, at some point, this will inhibit our ability for 'pay as you go' for capital projects without issuing debt," Rausch said. "I'm pretty certain it will also put us into short-term borrowing."

Chelsey Perkins

Chelsey Perkins grew up in Crosslake and is a graduate of Pequot Lakes High School. She earned her bachelor's degree in professional journalism at the University of Minnesota-Twin Cities. Perkins interned at the Lake Country Echo and the Rochester and Austin Post-Bulletins, and also worked for the student-run Minnesota Daily newspaper as a copy editor and columnist during college. She went on to intern at Utne Reader magazine, where she was later hired as the research editor. Before becoming the community editor of the Brainerd Dispatch, Perkins worked as the county government beat reporter at the Dispatch and a staff writer for the Pineandlakes Echo Journal.

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