Community growth and tax base are intertwined … in a ‘roundabout’ way

Pelican Rapids may have more important projects and needs and wants than its tax and debt capacity can comfortably afford. 

The street sewer-water and Highway 59-108 project; pool-aquatic center; dam removal-bridge replacement; and the conversion of the former senior building to a small community center are at the top of the list. 

This little understood “debt limit” component of municipal government was outlined at the Oct. 12 council meeting. 

You can draw indirect parallels to the raging “debt ceiling debate” at the federal level. But in Pelican city’s case, the council can’t vote to increase its debt limit. It is set by the state. 

Cities are subject to a statutory formula that measures debt service and capital improvement expenses against the municipality’s capacity to generate property tax revenue to cover the costs. Essentially, it is a mechanism to prevent cities from going bankrupt.

At recent meetings on the big Highway 108 and 59 reconstruction, several suggestions have surfaced—that the Minnesota Department of Transportation’s controversial roundabout and downtown driving-parking lanes could be circumvented. 

MnDOT’s highway plan is linked financially and logistically to the installation of city sewer and water. 

Roundabout foes suggest city go it alone—without MnDOT

Several opponents to MnDOT’s plans have proposed, in effect, to proceed with the city’s sewer-water installations—without MnDOT’s involvement. This would theoretically enable the city to proceed without the undesireable aspects of the project—such as roundabouts. 

Critics claim that MnDOT is “holding the city hostage” by insisting on roundabouts in exchange for about $6 million in state funding. MnDOT owns and has jurisdiction over the highway right-of-way.

Based on superficial estimates, the municipal works connected to the 59-108 project total about $12.1 million in total cost. If financed locally, the debt would add about $502 a year to a taxpayer with a $100,000 home. For a $250,000 home, taxes would increase by $1,646. 

For business and commercial properties, the annual tax increase would be $2,274, for a commercial property with a $200,000 taxable value. For a $500,000 commercial site, the taxes would increase by $6,472 a year. 

These estimates were gathered by Don Solga, city administrator, and presented to the council last week. 

For comparison, Solga estimated local taxpayer costs —if the city proceeded with MnDOT’s participation, the city would save about $6 million, mostly in excavation, below ground work and some surface work. 

For commercial and residential taxpayers, the annual tax increase would be about half—with MnDOT’s participation. 

For example, the city’s largest commercial-industrial taxpayer, West Central Turkeys, would pay an additional $13,470 a year without MnDOT cost-sharing—but $6,718 by partnering with MnDOT on the highway-street-sewer project. 

The statutory debt service limit of 3 percent of tax capacity enters into this equation. The city is “valued” at about $113 million, which means Pelican is limited to about $3.5 million in general obligation bond indebtedness. 

“We don’t have the debt cushion to do the (sewer-water upgrade) without MnDOT…We can’t go it alone.”

The exercise is more or less hypothetical and not likely. The city council is almost certainly not going to dig up main street to replace sewer and water lines beneath the highway one year—only to have MnDOT show up a few years later, and tear up the streets again to improve Highways 59 and 108. 

“Pelican is in a position where it really has to watch what it is trying to accomplish because you can only take on so much debt before you hit statutory limits,” said Solga. 

Sewer-water rates to increase in 2022

Portions of the city street-sewer project qualify for Public Finance Agency (PFA) loans, and those portions are financed largely through sewer and water user fees. PFA financed projects do not enter in to the general obligation bond debt limit calculation, fortunately. Or Pelican’s debt capacity would be even further strained. 

Pelican taxpayers should brace themselves now for an increase in monthly water-sewer fees, which are likely in 2022—in anticipation of the pending highway and sewer-water improvements. 

There hasn’t been an increase in sewer-water rates in nearly five years. Aware that Pelican’s residents are generally moderate to low income, the council has been cautious about rate hikes. 

But sewer and water fees can’t be indiscriminately used for other city improvements. 

Tax abatement also has statutory debt limits

Which brings up a third financing option: Tax abatement, which is also subject to debt limits.

If the swimming pool and/or the senior center were financed through abatement, it would likely exceed the city’s approximate limit of capturing $200,000 in abatement revenue annually. 

A fourth financing option: A special tax levy, which would go to the voters as a referendum. A voter-approved levy, for something specific like a swimming pool, might make sense. But special levy referendums are a gamble on the generosity of voters, and the city has not tried one at the ballot box, at least in recent memory. 

Taxpayers can expect increases in coming years 

No matter how you analyze it, Pelican city property owners will experience increases in coming years—in their property tax statements, and in their sewer-water bills. 

The sewer-water lines buried beneath Highways 59 and 108 are nearly a century old, in some locations. A near-catastrophic break in the center of downtown, in 2017, cost the city and MnDOT more than $200,000. 

The “useful life” of the underground lines “is gone,” said city engineer Bob Schliemann, who recommended the city proceed in conjunction with MnDOT. 

Why can’t Pelican have those great things, like Perham and Detroit Lakes?

It’s complicated, but it has a lot to do with a modest tax base, municipal debt limits, economic growth

People often wonder: Why is it so hard for Pelican Rapids to have a new swimming pool or a new community center? 

Well, in a simple sense—it is because Pelican Rapids can’t print more money. 

Cities are subject to state-mandated debt limits. Those debt limits are established by a city’s taxable value. 

Unfortunately, Pelican’s taxable market values have not increased substantially, year to year. With taxable values fairly stagnant, there is less tax base from which to produce revenue for important projects like pools and community centers—not to mention considerably less “sexy” and more costly projects like sewers, water lines, gutters, curbs and storm water facilities. 

If tax capacity is stagnant, the amount of allowable debt is stagnant. 

Frequent comparisons are drawn between Pelican and Perham, both somewhat similar in population. 

The difference? 

Perham’s solid commercial and residential growth means more taxable value, and as a result, more tax revenue to pay debt. 

To illustrate this in terms we can relate to, because of the current Congressional debate: Perham has a higher “debt ceiling.” 

Pelican’s “debt ceiling” is lower. This is because, frankly, Pelican is by and large a modest income community, which is growing modestly—not enough taxable growth to shoulder debt at the level of a Perham or a Detroit Lakes. 

In a nutshell: Taxable value drives how much debt a city is allowed take on.

This discussion came to the forefront in relation to the MnDOT Highway 59-108 reconstruction. Opponents of the downtown design, and its roundabouts, suggested the city should repair sewer-water without MnDOT participation—which translates to about $6 million.  This would likely push Pelican over its bonded indebtedness limits.

While the notion of “debt ceiling” is somewhat applicable to both the federal government and small cities. The big difference: Small cities can’t “vote” to increase its debt ceiling, nor can a small city print more money.