Plan could include wage freeze and dip into budget reserves

For the city of Eden Prairie, the rainy day has arrived. That means this fall, as staff and council members gear up for the next two-year budget cycle, it may be the time when the city taps into its rainy day fund.

City Manager Scott Neal said that the goal is to keep the tax levy flat into 2010 and 2011. To make that feasible, the city would keep employee wages flat in 2010 and tap into its reserve – more formally known as the budget stabilization fund, which currently has approximately $5 million in it.

Neal said both of those actions are appropriate given the purpose of the reserves, which was to cover the city in downturns and also given the fact that employee wages are flattening throughout the private sector economy so it’s not unreasonable for them to be flattened in the public sector economy.

The city typically operates under a two-year budget planning cycle, which starts up again this fall. Last year, in light of the economic downturn, the council took the step of amending the 2009 levy to keep city taxes flat from 2008. A wrinkle in that plan came about this spring when it became apparent that the city faced an unprecedented lag in revenue that typically comes through building development.

To fill the projected shortfall, the city tapped $500,000 from the budget stabilization fund, $200,000 saved in the operations budget and $300,000 in personnel reductions, which eliminated 10 employee positions. Four of the positions were unfilled, while six full-time city employees were let go. Neal noted that since cutting the six employees, one was rehired to another position.

Neal said that the city reduced the number of employees in areas where the workload was decreasing, primarily related to building development. Another position was cut because it was a case where the city could redistribute the work from that position among existing staff members.

Unless the economy changes drastically, Neal does not plan on proposing additional layoffs for this year, or into 2010-11.
If the economy takes another downturn, all bets are off, he noted, but “right now we’re not projecting additional decreases in staffing levels.”

Cuts from the state

Though facing tight budgets and layoffs, Eden Prairie finds itself in a far better position than many cities, which may soon bear the brunt of impacts from cuts in state aid.

The legislative session adjourned with an approximately $2.7 million gap in the budget. The gap is being addressed through the unallotment process. According to the Gov. Tim Pawlenty’s office, the unallotment reductions will include a $200 million cut to local aids and credits to cities and townships.

Eden Prairie receives money from the state in two forms: aid to police and firefighter pensions (which will likely be unaffected this session) and through the Market Value Homestead Credit. As part of the cuts proposed by the governor, Eden Prairie will not be receiving its Market Value Homestead Credit reimbursement from the state for 2010 and 2011. According to Neal’s blog on the subject, the state owes the city $456,419 in 2010 and $511,416 in 2011.

The MVHC program requires that cities provide a tax break for residents and then the state reimburses cities for the lost revenue. Neal has previously written about the problems with the program. In a recent blog entry on the subject, he wrote, “While the MVHC program may be a noble program established out of noble sentiment, the state operates it is as (almost) a scam.”
In an interview, Neal noted that Eden Prairie did not receive its MVHC reimbursement in 2003, 2004, 2005 and 2006. In 2008, the city received half the fund and then the governor unallotted the second half, while no reimbursement will be forthcoming in 2009, 2010 and 2011.

Neal noted that the city gives a tax break, but then the state decides not to reimburse cities because it can’t afford it.
“It’s disingenuous and it’s not transparent,” he said about the program.
It’s also a program that Eden Prairie doesn’t count on.
Neal noted that some cities budget for MVHC as an operating revenue in their general funds.

But, for a number of years Eden Prairie has funneled this fluctuating revenue source into capital improvements. City operations are not dependent on the credit.
While Eden Prairie is not dependent on state aid, other cities who set their budgets based on Local Government Aid (LGA) will feel the pinch. Eden Prairie does not receive LGA.

“I think in some cities it’s going to be devastating,” said Neal, noting that in Northfield where he was previously a city manager, 30 percent of the city’s general fund revenue came from LGA.
Neal said the city that will face the biggest struggle is probably going to be St. Paul, which is dependent on LGA and the fiscal disparities program.

While LGA will be cut, the funds for fiscal disparities are tied to the commercial real estate base, noted Neal.
When it comes to Eden Prairie, “we’re fortunate on three fronts, really,” Neal said
He said Eden Prairie is fortunate that it is not depending on state financial aid, and that city leaders in past decades were able to put money away.

When growth shot up in the ’90s, “those city leaders recognized that it wasn’t always going to be like that and they established some reserve funds for just this kind of time.”
Thirdly, Neal noted that Eden Prairie has a lot of good people here on its council and staff who are going to figure out ways to fulfill the city’s mission with the same or fewer resources.
“We have smart people here and we’re going to figure out how to keep doing what needs to be done.”