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PART VI
FINANCE, BUDGETING, AND DEBT
CHAPTER 21 : BUDGETING
I. Review of revenue sources 3
II. Role and purpose of budgeting 4
III. The budget process 5
A. Budget responsibility 5
B. Budget format 5
1. Uniform chart of accounts 5
C. Budgeting techniques 6
1. Line item budgeting 7
2. Performance budgeting 7
3. Planned programming budget system 8
4. Zero based budgeting 8
5. Program performance budgeting 9
D. Estimating revenues 10
E. Estimating expenditures 10
F. Budget checklist for councils 11
G. Budget execution 12
IV. Long-term budget planning 13
A. Long-term financial plan 14
B. Capital improvement budgeting 14
C. Signs of financial stress 16
1. Long-term debt 16
2. Short-term debt 16
3. Total interest payments 16
4. Tax per capita 17
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5. Unfunded local pension or other liability 17
D. Use of financial indicators 17
E. Better budgeting guidelines 18
V. How this chapter applies to home rule charter cities 18
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Chapter 21
Budgeting
Minn.Stat.§275.065(truth-in- Although budgeting is the first and most essential ingredient of any efficient
taxation law). system of administration,it has sometimes been a neglected,poorly
implemented,and ignored fundamental of city government. All cities are
Minn.Stat.;412.651.suhd.7 and required to prepare a proposed annual budget and submit it to the county
Minn.Stat.§§412.701 to 412.731 auditor. Larger cities are required to hold a property tax hearing,and give
(for Plan B cities). notice of the proposed budget adoption. Cities with the Plan B form of
government also have additional budgeting requirements. Likewise,many
home rule charter cities may have additional requirements in their charters.
A budget is a comprehensive financial plan for a specific period of time. It
outlines city activities and service levels,and contains estimates of probable
costs and available revenues during the coming year.
This chapter discusses some of the fundamentals of budgeting. More
See League research memo complete discussions of the subject,including detailed directions on
Guidelines for Preparing City budgeting procedures under the truth in taxation statutes,are discussed in
Budgets(215b.1). the League research memo Guidelines for Preparing City Budgets(215b.1).
This chapter covers the following topics:
I. Review of revenue sources
II. Role and purpose of budgeting
III. Budget process
IV. Long-term budget planning
I. Review of revenue sources
See Handbook,Chapter 20,for a Before preparing the annual budget,the council should inspect the total city
discussion of revenue sources. revenue. First,the council should determine if the city is making the best use
See also League research memo of its taxing powers. This includes deciding whether the tax rate,within any
Guidelines/or Preparing City home rule charter tax levy limitations,if applicable,is adequate to meet the
Budgets(215b.I). revenue needs of the city. A second advisable feature is a review of available
intergovernmental grants and aids. Cities should seek to utilize these types
of aids if this assistance is available. Finally,councils must give a regular,
thorough study to the adequacy of other sources of city revenue. In
particular,this review should attempt to answer three questions:
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• Are license fees and charges for city services adequate to cover the
city's costs and expenses for such programs?
• Should the city establish fees for other city service programs that are
currently provided free of charge?When the city initiates a new
program, such as a swimming pool,the council should decide whether
or not to charge program users. It is always easier to begin charges when
the city first provides the service,than it is to initiate fees at a later date.
• Are the council and other boards properly managing the city's fund
balances?A regular review is the only way to ensure maximum and
equitable use of present revenue sources.
The revenue side of the city financial statement is the chief concern of city
councils. As governmental costs continue to increase,and as further
demands for public services lead to new governmental programs,the strains
on cities'pocketbooks have increased--particularly in small cities that often
face decreasing or stagnant property values. The traditional way to meet this
challenge has been to strive for greater efficiency in the present programs.
See League research memo
Guidelines for Preparing cr„ I I. Role and purpose of
Budgets(215b.1).
budgeting
Budgeting is critical for city finance and administration. Proper budgeting
can assist the council in the performance of five vital functions:
• It is a vehicle through which the council can obtain estimates of the
expected revenues for the coming year and plan city spending.
• Once the council has allocated available money among the various city
services,the budget can help control expenditures.
• Because budget preparation involves necessary decisions about the use
of money,it facilitates important decision-making.
• At the conclusion of the budget year,the budget document can help the
council evaluate the level and quality of city services provided during
the year.
• By measuring the level and quality of services citizens received for each
dollar spent,the council can measure the efficiency of providing each
service. In this way,a budget serves as a check on administrative
operations.
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See League research memo
Guidelines
lor Preparing city III. The budget process
Budgets(215b.1).
The basic steps involved in budgeting are:preparation;consideration, final
adoption; and implementation of expenditure controls. Preparation consists
of developing estimates of the necessary expenditures for the coming year,
for each city activity,as well as developing the revenues available to pay for
them. Consideration and final adoption of the budget constitutes the second
stage of the process. Finally,the process ends as the expenditure controls
established in the budget are implemented.
A. Budget responsibility
Ultimately,budgeting responsibility resides with the council. The council
must accept or reject the budget,and insist upon standards of budget
enforcement. Generally,cities delegate budget execution or enforcement to
the chief executive or administrative officer of the city.
Minn.Stat.§412.651,subd.7. The statutes impose these duties on the manager in Optional Plan B cities.
Although the law does not require it,the responsibility should logically go
to the clerk or administrator in cities operating under Plan A.
See Handbook Chapter 1,Section In Standard Plan cities,the council might use either of two procedures. It
n B.Types of cities b,government might delegate the task of coordinating departmental budget requests to a
structure.
council committee. It may make either this committee or an administrative
officer responsible for budget execution. The council may also give the
responsibility for both budget preparation and execution to the clerk,deputy
clerk or other official responsible for the supervision of all city activities.
B. Budget format
See League research memo Two aspects of the budget format need consideration: the actual forms city
Guidelines/or Preparing ing c,,, officials use in preparing the budget,and the classification of accounts or
Budgets(215b.1).
account titles for summarizing data. Sample budget forms are included in the
League publication, Guidelines for Preparing City Budgets.
1. Uniform chart of accounts
See OSA web site for a uniform The Office of the State Auditor sets a standard chart of accounts that may be
chart of accounts, used for city budgeting. The"Classification of Accounts for Use by Fiscal
Officers in Cities"can be used as the basis for most city budgets. Every city
should consult this chart of accounts for maintaining financial records and
for preparing the annual budget.Although cities may modify this chart the
state auditor requires use of this format for the annual reports every city
must file with the auditor's office.
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C. Budgeting techniques
This discussion was taken in part Generally,the purpose of any budget is to serve as a policy document that
from Management Policies in sets goals and tracks performance. This policy helps city managers and other
Local Government Finance,3rd
edition(ICMA),pp. 153-156.See decision-makers make choices about allocating resources among competing
also,The Municipal Yearbook needs. Decision-makers must find the budgeting techniques that work best
1995(ICMA),pp.42-52. for their city.
City councils face peculiar problems:
• A city nearly always has limited resources due to rising costs and citizen
demands.
• City officials face uncertainty about which programs and what level of
service to offer.
• Cities problems with resource allocation.
While cities cannot eliminate these problems,they can diminish their impact
through sound budgeting. A budget system should outline priorities,conduct
program evaluations,allow for management implementation and reporting,
and provide sound financial resource planning and management.
There are many types of budgeting techniques. Some of these are: line item,
performance,planned programming budget systems(PPBS),zero based
budgeting(ZBB),and program performance budgeting(PPB). An analysis
of each functional area for each budget type indicates the advantages and
disadvantages of each system.
Generally,there are seven functional areas to consider:
• Structure of the budget,or how it appears on paper.
• Effectiveness of the budget for planning. To be effective,the budget
must establish goals for future direction.
• Evaluation--the budget must critically examine the past.
• The budget must set forth the available resources.
• An effective budget should establish program priorities.
• Finally,the tool should aid management by helping monitor and
evaluate performance.
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CITY OF SCANDIA
CITY COUNCIL AGENDA
Workshop Meeting
Tuesday, January 30, 2007
7:00 p.m. to 9:00 p.m.
1. Call to Order
2. Roll Call
3. Training Video—Minnesota Open Meeting Law (approx. 30 minutes)
4. City Budget and Finances (approx. 45-60 minutes)
a) Budget process/calendar
b) 2006 budget outcomes/ fund balances
c) 2007 budget overview
d) Future budget/finance issues
5. Other Training Needs (approx. 15 minutes)
a) Emergency Management—NIMS
b) Other?
6. Adjournment
CHAPTER 21
1. Line item budgeting
The line item budget is the most traditional type of budgeting for cities. This
approach divides the city into departments and divisions. For instance,the
parks and recreation department prepares its own line item budget. The
budget lays out a one-year financial plan,detailing each individual expense
category.
This type of budget allows evaluation on the basis of expenditure trends.
The council can compare last year's expenditures with the current year's
projected expenses. Resources to fund a line item budget are usually
supplied from the general fund. Typically,capital expenditures and major
improvements are separate.
Perhaps the strongest feature of a line item budget is its high degree of
control. The document details each line item expense. Management can
monitor a line item budget by examining the financial reports. The degree of
complexity of a line item budget varies according to a city's size and needs.
2. Performance budgeting
Performance budgeting is an outgrowth of the line item budget. Its purpose
is to help decision-makers analyze service production. A program budget,
like a line item budget,has a structure consisting of departments and
divisions. The performance budget includes a plan that defines the amount
of service that can be produced for a given amount of resources.
Evaluating a performance budget requires examining the amount of output
produced at a defined workload based on some unit of production. To
control the overall plan,this technique examines general expense categories
and not individual line items. This tool helps set priorities and allows
decision-making based on a more results-oriented approach. The
performance budget is a useful managerial tool because it helps monitor
workloads and can compare actual results against the plan.
Performance budgeting assists in managerial decision-making. Its biggest
shortcoming is that it only emphasizes output. Performance budgeting will
show how much a department produced,but it will not show how well or
poorly the department delivered the service.
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3. Planned programming budget system
The planned programming budget system(PPBS)helps councils compare
programs and the services provided. The planning technique sets very high
and general goals. A typical goal is to improve the public health,safety,and
welfare,as opposed to hiring three,new public safety officers.
A major weakness of PPBS is that it is general rather than specific.
Evaluation is a problem because PPBS lacks objectives against which to
measure performance. Control is also difficult because it usually gives a
bottom line figure,for example: $200,000 budgeted to improve public
safety. Prioritizing is difficult since the information is so general;therefore,
priorities tend to depend on value judgments. Finally,PPBS is of limited use
for management analysis because it aims only at general annual goals.
4. Zero based budgeting
The theory behind zero-based budgeting(ZBB)is to force each department
to start from zero and justify its service. The structure of ZBB consists of
decision units,which are not complete programs but pieces of programs.
The ZBB method allows planning for incremental objectives starting from
zero,but cities generally start at 80 percent below current funding because it
is impossible to cut services altogether. Evaluation is on the basis of
decision packages that define the resources needed to accomplish a given
level of service. As with the other methods,it identifies only the general
fund as a resource.
Control through ZBB is similar to control in performance budgeting. The
method identifies expense objectives,rather than just bottom line figures.
The city establishes priorities through incremental rankings,forcing
managers to rank priorities by stacking up decision packages to determine
need. This approach can create situations where decision-makers must
choose between service levels that are difficult to compare. For example,
how can the need for five new swingsets be evaluated against the need for
an additional police officer?ZBB can be useful because of the forced annual
rankings. Councilmembers examine these rankings and finance the most
important city services.
The use of ZBB has several advantages:
• First,ZBB encourages organizational assessment by forcing department
heads to critically assess their departments.
• Second,it allows for departmental involvement and,thus,more satisfied
workers.
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• Third,ZBB forces decision-makers to come up with alternative
implementation techniques and establish objectives.
However,there are some disadvantages to ZBB:
• First,when using ZBB,the starting point is not zero,but probably about
80 percent below current funding due to statutory and contractual
obligations.
• Second,ZBB increases paperwork and administrative workloads
because of its many decision packages.
• Third,there is a possibility of misuse because each department manager
decides exactly what goes into each decision package.
• Fourth,annual reassessment of service rankings may be too frequent. In
some situations,review is necessary only every three to five years.
• Ranking of priorities is impractical in some cases.
5. Program performance budgeting
Another budgeting technique consists of a mix of the favorable parts of
other budgeting techniques.A program performance budget(PPB)has a
structure that shows programs and departments. Typically,there is a broad
service area,and a general and specific program description. This planning
technique lists specific service targets that are well-defined goals for the city
to accomplish. Evaluation is complete and provides information about the
need for the service,the city's response,the cost,and the impact of each
service or program.
The PPB method differs from other budgeting methods in that it examines
total resources,and not just the general fund. Control is strengthened
because there is a summary of each program,along with a line item chart of
accounts. The strongest factor is the PPB's ability to assist in setting
priorities. The technique promotes rational choices by comparing a service-
cost balance. The PPB is a useful managerial tool because it provides regular
performance reports,as well as detailed financial reports.
Program performance budgeting pleases the public and city officials because
it provides an understandable document,and the service-cost balance shows
the importance and cost of different services.
The intent of a PPB is to provide an analysis of demand,workload,
productivity,and effectiveness.
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• Demand(need)can be measured by factors such as applications and
requests for a service,complaints received,population changes,and
external deficient conditions.
• Workload(response)is indicated by production of units,construction,
maintenance,processing,people served,and time spent.
• Productivity(cost)is measured by efficiency per unit. Ratios that PPB
uses include dollars/units,units/dollars,time/units, or units/time.
• Effectiveness(outcome)is measured by qualitative factors,
responsiveness,customer satisfaction,problem reduction,and
achievement of objectives.
D. Estimating revenues
See Handbook,Chapter 20,for The first step to estimating revenues is to identify and isolate the revenue
discussion of sources of revenues. sources. The city should then look at each source and its past performance
and future expectations,taking into account any trends or institutional
changes that might disrupt the pattern.
After estimating all other revenues and assessments,the city must determine
the amount of money needed from property taxes. This sum should be an
amount sufficient to balance the budget. The tax levy may not,of course,
exceed any tax levy limitations for various funds,nor may it exceed any
home rule charter levy limitations.
No single formula is available for estimating city revenue. Each individual
revenue estimate depends on individual,relevant factors.
E. Estimating expenditures
Cities must estimate several kinds of expenditures such as current expenses,
See League research memos capital outlay expenditures,and debt redemption. Certain current expenses,
Guidelines for Preparing Cirr sometimes called operating expenditures,consist of relatively fixed charges
Budgets(215b.1)and Public and are comparatively easy to estimate. These are items such as rent,interest
Purpose Evpendinures(215h2.1).
expense,salaries,contractual costs,and other charges the city establishes by
agreement that cannot be reduced during the budget year.
Budgetary estimates of these costs can be on the basis of past experience,
plus necessary increases based on inflation. It is generally only these
increases,and not the basic costs themselves,that the budget officer or the
council can alter. The only manner in which the city can change such costs
is to discontinue the program,reduce the program's quality,or look for
opportunity to provide the service cooperatively with another unit of
government.
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Other current expenses,sometimes called supplemental expenditures, are
those related to new policy and administrative proposals, such as the costs of
expanding an existing work program or starting a new city service.
Supplemental expenditures entail important policy questions because they
require the council's close scrutiny and careful consideration. Councils
should ask for public opinion on such proposals during the development of
the budget and at the Truth-in-Taxation public hearing.
The distinction between basic and supplemental expenditures has a twofold
importance in the budget process. It stresses that each city has a large burden
of fixed costs that the council can manipulate to only a minor extent,and
which cannot be substantially reduced without curtailing existing services.
Also,it places special emphasis on the policy matters in the budget,and
helps to relate the costs of government with the quality of government
services.
F. Budget checklist for councils
Minn.Stat.§412.241. After the budget officer has prepared the preliminary budget,the council
Minn.Stat.§275.065. must assume full responsibility for reviewing and approving it in its final
form. In this review,the council should consider several questions:
• Does the budget meet the needs of the community?Are there some
services the city should reduce or eliminate to provide funds for new
programs,for the expansion of existing programs,or in order to reduce
the property tax levy?
• Does the budget provide proper balance between activities,especially
between more essential and less essential services?
• Will the level of service funded in the budget ensure adequate standards
of service?
• Is the proposed budget sound and honest?Is the estimate of revenues
realistic?Does it include all expenditures and conceivable
contingencies?Does it contain a contingency appropriation for
emergencies?
• Is the budget economical,providing the greatest value per dollar?
• Does the budget discharge a city's responsibility for the future?Is it
consistent with the city plan and with other long-term policies for the
development of the community?
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Minn Stat. 412.711. Whether or not a city is operating under Optional Plan B,approval of the
budget in its final form should be as a resolution of the council. An
ordinance is not necessary. A simple majority of the council will suffice to
pass the resolution. The resolution,which Plan B cities must adopt by Oct.
1, should set forth the total amount budgeted for each purpose or fund. The
resolution should also contain whatever detailed breakdown of expenditures
the council deems necessary for adequate budget control.
G. Budget execution
The preparation of a budget is meaningless unless the council makes sure
See Handbook Chapter i,Section city employees follow it. The controls needed for an adequate system of
II B. Types ofciaes hi•government budget execution depend on the size of the city and its form of government.
structure. Larger cities should use the system of allotments and encumbrance
accounting,in which the money budgeted for any specific purpose(the
police department,for example)is allocated to that purpose(the police
department). Additionally,cities may wish to consider adopting a legal level
of budgetary control based on categories of expenditures. This prevents
exhaustion of the appropriation before the end of the calendar year,and
places limits on the amount of expenditures that can be made by a
department without seeking additional approval.
There are two minimum controls every city should exercise,regardless of
size.While responsibility for these controls belongs to the council,either an
administrative officer responsible to the council or a council committee may
implement the controls in actual practice.
The first of these controls is a requirement that no expenditure should occur
until a designated person has checked to see whether or not adequate funds
are available. In other words,no expenditure occurs unless the council
authorized the expenditure in the original or a subsequent budget resolution.
Once a city adopts a budget,only the council should authorize any
deviations.
The second essential control is a budget reporting system. The council
should require a monthly or quarterly report that details each budget item,
the amount budgeted,the amount already spent,the amount not yet spent but
committed for a particular budget item,and the budget amount that remains
unspent and uncommitted. With this information,the council can scrutinize
administrative operations,exercise greater control over future spending,and
make any needed adjustments in the budget.
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Minn.Stat.;412.731. Note: In a Plan B city,the council may only modify the budget by a four-
fifths vote of all members of the council in the following situations:
• On a resolution to reduce the sums appropriated for any purpose by the
original budget resolution,or
• On a resolution to authorize the transfer of sums from unencumbered
balances of appropriations in the original budget.
Minn.Stat.8 462.358.subd.2a The 2006 Legislature made changes to subdivision regulation law that could
affect city budgets. Effective Aug. 1,2006,a city or town may require that
an applicant seeking subdivision approval establish an escrow account or
other financial security to reimburse the municipality for direct established
costs relating to the review,approval,and inspection of the project. In
addition,this law establishes a 30-day deadline for release and return of an
applicant's financial security when the municipality's conditions for
approval are met.
Once an applicant vouches,by certified letter,that all of the city's
subdivision requirements are met,the city has 30 days to release and return
to the applicant any and all financial securities tied to the requirements—if
the city does not release the financial security within 30 days,the city must
pay any accrued interest to the applicant.
If the city determines that the conditions for approval are not met by the
applicant,the city has seven days from receipt of the certified letter to
provide written notice to the applicant indicating which specific conditions
are not met.A municipality must require a maintenance or performance
bond from any subcontractor that has not yet met all the municipality's
remaining requirements.
A reporting system is the most important facet of any expenditure control
program. Budget reports should include a summary of work
accomplishments under the budgetary appropriation to-date. Only with this
information in hand,can the council maintain an adequate check over the
enforcement of the budget and the administrative activities of its
subordinates.
IV. Long-term budget planning
While cities only prepare their budgets for the next 12 months,councils
must be aware of the long-range financial problems and demands facing the
city.
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A. Long-term financial plan
In addition to the annual budget,a long-term city financial plan includes the
following:
Public services program--a long-range plan for all public services,
estimating future needs for recreation, fire protection,police protection,and
so on. The plan measures the objectives and needs for each city department,
the standard of services,and the impact of such services on the annual
operating budget.
Capital improvement program--a major public infrastructure and
planning tool includes a comprehensive list of projects and facilities the city
needs or will need to carry out public services. (Public services, in this
context,mean the basic facilities,services,and installations needed for the
functioning of a city,including transportation,water, stormwater,
wastewater plants and pipes,and so on.)
Long-term revenue program--a tentative revenue policy that develops
long-term plans for financing public services and capital improvements.
Capital budget--this summarizes,on a five-or six-year period,the capital
or money requirements for capital improvements or purchases. A capitol
budget lists a priority for each anticipated investment in community
facilities,and balances this with the availability of revenues.
B. Capital improvement budgeting
When cities prepare their budgets for the upcoming fiscal year,councils
must be aware of the long-range financial problems and demands facing the
city. In addition to the annual budget,a city would be well served to prepare
a long-term financial plan that includes a capital improvement program,
Capital budgeting is a list of needed capital improvements(sewer and water
infrastructure,public buildings,equipment or land purchases),their order of
priority,and the means of financing. The capital budget summarizes,for a
five or six-year period,the capital or money requirements for capital
improvements or purchases.A capital budget allows a city to build up a fund
balance for capital improvement projects. Priorities in the capital budget
program remain tentative and the council should review them annually.
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A capital improvement plan often provides many advantages,including:
• reducing or stabilizing the property tax rate;
• preventing peaks and valleys in a city's debt retirement program;
• allowing the city to move gradually to a pay-as-you-go program of
capital expenditure financing; and
• Helping to preserve the city credit rating by preventing an over-
extension of credit and maintaining a credit reserve for emergencies
at all times.
Although capital budgeting may appear cumbersome and unwieldy to a
small city,this is actually not the case.A capital budget provides protection
to the small city,helping it avoid commitments and debts that would limit its
ability to later pay for needed necessary,but costly, capital improvements.
The responsibility for capital budgeting is usually the responsibility of the
chief administrative officer,the clerk,clerk-administrator or city manager.
Aiding this person should be the council,a committee of the council,the city
planning commission,and the treasurer or chief fiscal officer.
Capital budgeting usually involves the following procedures:
The chief administrative officer makes up a priority list of anticipated capital
improvements that the city will need within the next few years,usually five
to 10 years.
A careful evaluation follows with the elimination of those capital
improvements that overlap or duplicate.
The end result is a priority list of capital improvements on the basis of need,
considering the community's present and future program of public services.
The city then puts these improvement projects into a multiple-year capital
improvement program on the basis of the established priority. When the
council reviews it in light of the community's financial situation, it may find
the city should defer some of the projects beyond the improvement period
and other projects indefinitely.
Following this,the budget officer recommends projects for the coming
budget year. The recommendations,in effect,become the recommended
program.
Priorities in the capital budget program for the following years remain
tentative,and the council should review them annually. At that time,the
council should consider the addition of new projects and the deletion of
others.
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Although capital budgeting may appear cumbersome and unwieldy for the
small city,this is actually not the case. A capital budget provides protection
to the small city,helping it avoid commitments and debts that would limit its
ability to later finance more important capital improvements.
C. Signs of financial stress
Financial analysts do not agree on how to predict future city financial
problems. Certain indicators are useful in measuring any city's financial
stress position. Periodic evaluations should allow the council to take steps to
head off any developing financial emergency. The five most effective
financial indicators include long-term debt,short-term debt,total interest
payments,tax per capita,and unfunded pension or other liabilies.
1. Long-term debt
The amount of long-term debt varies greatly depending on the kind of
community,its maturity,and the extent to which it has undertaken a
consistent,long-term capital improvement program. However,cities may
find it useful to compare their long-term outstanding debt with other
communities of similar size and demographic traits.
2. Short-term debt
The dollar amount of short-term debt outstanding is usually less significant
than the year-to-year trend of that debt. Most Minnesota cities must,by law,
pay off each issue of tax or revenue anticipation debt by the end of the city's
fiscal year. Such tax anticipation certificates or warrants,which the city
retires by taxes and does not refinance by another short-term issue,present
no real cause for alarm. However, if a city makes extensive purchases on
open account,uses temporary improvement financing extensively,or uses
any other obligations that force it to go into the money market at a particular
time,consequences can be severe. When the only possible means of paying
off such debt is to go into the money market,default is inevitable if the
market rate is above the permissible statutory rate or,in the bond raters' and
buyers'judgment,the city's financial position is so shaky as to make the
city's bonds a bad investment.
3. Total interest payments
See Handbook chapter 24,Debt This index will not completely be a function of the outstanding debt. The
and Bo,
mg, mix of long-and short-term obligations,the timing of the various offerings,
and the bond raters' and buyers'perceptions of the soundness of the
community all influence this indicator.
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4. Tax per capita
The tax per capita(or tax levied by the city on a per person basis)of all the
overlapping local governmental units,determines the amount of capacity to
respond to a financial emergency. If the local tax rate in a city is high in
comparison to other cities,and particularly in those cities in the same region,
any increase will likely result in a loss of tax base,resulting in a decrease in
tax revenue. This can have a negative long-term effect on the ability of a city
to maintain financial stability and current service levels. In such
circumstances,there is little opportunity to meet local increased revenue
demands.
5. Unfunded local pension or other liability
See the League's HR Reference Cities may need to budget to cover any shortfalls in the number of local
Manual,Chapter 4.See also pension plans,such as the pension plans for a volunteer firefighter relief
League research memo Guidelines
for Preparing City Budges association. There are also specific reporting requirements and actuarial
(215b.1). surveys that must be done.
Minn.Stat.;69.772,subd.6. Typically,cities contribute a set amount to the volunteer firefighter's
pension fund. However,if the fire relief association changes their bylaws it
See Guidelines for Preparing Cin can have a significant impact on the relief association's pension benefits. In
Budgets.section c.2 Volunteer most cases,the city council must approve these changes before they can take
Firefiehters'Relief Associations.
effect. The council should carefully consider the possible financial impact of
such changes. The council should have the city clerk or other qualified
financial expert review the financial implications before ratifying the
changes. Failure to properly calculate the special fund requirements could
cause the special fund to run short. This could mean the city would have to
substantially increase its tax levy for the relief association.
D. Use of financial indicators
Cities should use these five indicators(long-term debt,short-term debt,total
interest payments,tax per capita,and unfunded local pension or other
liability)for comparing one community with other communities of similar
size and maturity. For example,a suburb that has sprung from largely
undeveloped land in the last 20 years should not compare itself to an old,
free-standing community with a stable population.
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CHAPTER 21
Comparisons should provide a good basis for evaluating the local financial
health of a city. A high standing in any one of the five areas should not be
particularly alarming if the other areas are low. However,even a single,
high-standing index may provide reason to look carefully at that area,in
order to see if changes might improve the city's prospects for economic
stability.
See OSA web site(OSA Reports: Statistical information for the purpose of making these comparisons is
Listing of Government Information available in reports of the state auditor on revenues,expenditures,and debt
Reports) .
of Minnesota cities. Information on pension funding is available from the
Legislative Commission on Pensions and Retirement.
E. Better budgeting guidelines
The following six-steps are guidelines toward better budgeting. In
processing their annual budgets,cities should:
• Coordinate budgeting and accounting procedures.
• Devise good working papers for the preparation and execution of the
budget.
• Prepare a budget calendar.
• Create an annual budget that considers all city operations from a long-
range approach rather than a piecemeal,short-range approach.
• Extend the budget-making process to include citizens.
• Establish effective methods to control expenditures in accordance with
the budget plan.
Budgeting,both as a long-term financial guide and as a short-term,annual
plan of operation is an indispensable part of city administration.
V. How this chapter applies to
home rule charter cities
Some city charters contain limitations or standards on how the council
should develop the budget.
21:18 HANDBOOK FOR MINNESOTA CITIES
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,2W1?-7- C-fiveS
2 ,
Minn,Stat.§645.08151. For most other public bodies,a majority of its qualified members
constitutes a quorum.
B. Open meeting law
1. Purpose of the open meeting law
St.Cloud Newspapers,Inc.v. The open meeting law requires that meetings of public bodies must
Dist. 742 Community Schools,
332 N.W.2d 1(Minn. 1983). generally be open to the public. It serves three vital purposes:
• Prohibits actions from being taken at a secret meeting where the
interested public cannot be fully informed of the decisions of public
bodies or detect improper influences.
• Ensures the public's right to be informed.
• Gives the public an opportunity to present its views.
2. Groups governed by the open meeting law
Minn.Stat.*§ 13D.01,subd. 1; Under the Minnesota open meeting law,all city council meetings and
465.719,subd.9. executive sessions must be open to the public,with only a few exceptions.
The open meeting law also requires that meetings of any committee,
subcommittee,board,department or commission of the city council be
open to the public. The governing bodies of local public pension plans,
housing and redevelopment authorities,economic development authorities,
and city-created corporations are subject to the open meeting law. The
Minnesota Supreme Court has held,however,that the governing body of a
Southern Minnesota Municipal municipal power agency,created under Minn. Stat. §§ 453.51-453.62,is
Power Agencv r.Borne,578
N.W.2d 362(Minn. 19981. not subject to the open meeting law because the Legislature granted these
agencies authority to conduct their affairs as private corporations.
3. Gatherings governed by the open meeting
law
Moberg v.Indep.Sch.Dist.No. The open meeting law does not define the term"meeting."The Minnesota
281,336 N.W.2d 510(Minn. Supreme Court,however,has ruled that under the open meeting law,
1983);St.Cloud Newspapers,
Inc.v.Dist. 742 Community meetings are gatherings where a quorum or more of the council or other
Schools,332 N.W.2d 1(Mine• governing body or of a committee,board,department or commission of the
1983).
council or other governing body,are present,and at which the members
intentionally discuss,decide or receive information as a group on issues
relating to the official business of that body.
HANDBOOK FOR MINNESOTA CITIES 7:11
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CHAPTER 7
As a result,the open meeting law does not generally apply in situations
where less than a quorum of the council are involved. However, serial
meetings in groups of less than a quorum that are held in order to avoid
open-meeting-law requirements may be found to violate the law,depending
on the specific facts.
a. Interviews
Mankato Free Press r.City o/
A 1997 Minnesota Court of Appeals' decision considered a situation where
North Mankato,563 N.W.2d
291 (Minn.Ct.App. 1997). individual council members conducted separate interviews of candidates
for a city position. The district court found that no"meeting"of the council
had occurred because there was never a quorum of the council present. The
court of appeals sent the decision back to the district court for a
determination of whether the council members had conducted the interview
process in a serial fashion to avoid open-meeting-law requirements.
Mankato Free Press v.Cut of On remand,the district court found that the individual interviews were not
North Mankato,Apo,No.. , 677 done to avoid open-meeting-law requirements. This decision was also
(Minn.Ct.App.Dec. 15, 1998)
(unpublished opinion). appealed,and the court of appeals,in a 1998 unpublished decision,
affirmed the district court's decision.Cities that want to use this type of
interview process with job applicants should first consult their city
attorney.
b. Informational meetings
St.Cloud Newspapers,Inc.v. The Minnesota Supreme Court has held that informational seminars about
Dist.N.W.2d Community Schools, school board business,3usness whichthe entire board attends 32 1(Minn.1983). >
>must be noticed and
open to the public. As a result,it appears that any scheduled gatherings of a
quorum of a public body must have proper notice and be open,whether or
not the public body takes or contemplates taking action. This includes
meetings where members receive information that may influence later
decisions,but excludes chance or social gatherings. A quorum of members
of a public body,however, cannot discuss or receive information on official
business in any setting under the guise of a private social gathering.
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Thuma v.Kroschel,506 N.W.2d Under certain circumstances,it may be possible for a quorum of the city
la(Minn.Ct.App. 1993). council to attend a meeting of another public body without violating the
A G.Op.63a-5(Aug.28. (996). open meeting law even though notice of a special council meeting is not
provided. For example,when persons constituting a quorum of a city
council attended a meeting of the city's planning commission,the
Minnesota Court of Appeals ruled that there was a violation of the open
meeting law—not because of the council members' attendance at the
meeting—but because the council members conducted public business in
conjunction with that meeting. Based on this decision,the attorney general
has advised that mere attendance by additional council members at a
meeting of a council committee,held in compliance with the open meeting
law,would not constitute a special council meeting requiring separate
notice. The attorney general advised,however,that the additional council
members should not participate in committee discussions or deliberations
absent a separate notice.
Compare St.Cloud Newspapers, It is not clear whether the participation of a city council in a training
Schools,Inc.v.D 332t. N.42 Community ro am sponsored bythe League of Minnesota Cities to developvarious
N.W.2d 1(Minn. program P �
1983)with A.G.Op.63a-5 skills would be defined as a meeting under the open meeting law. The
(Feb.5, 1975). determining factor may be whether or not the program includes discussions
of specific matters relating to an individual city's business.
c. Technology
Moberg v.Indep.Sch.Dist.No. It is not entirely clear how the open meeting law applies to technology,
281 336 510(Minn.achsuch as e-mail or telephone calls. Although the law does not specifically
1983);See League researchP g P Y
memo,Meetings of City address the use of e-mail and other technology,it is likely that any form of
Councils(140B.I),for more communication between council members or members of other public
information.
bodies could violate the open meeting law under certain circumstances.
See LMCIT risk management As a result,city councils and other public bodies should not use e-mail,
memo,Electronic
co,nn„mications Bete een telephone calls,and other technology to communicate with other members
Council Members. of the public body when both of the following circumstances exits:
• When a quorum of the council or public body will be contacted
regarding the same matter.
• When city businesses is being discussed.
4. Open meeting exceptions
The open meeting law is designed to favor public access. Therefore,the
few exceptions that do exist are carefully limited to avoid abuse.
HANDBOOK FOR MINNESOTA CITIES 7:13
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CHAPTER 7
Minn.Stat.§§ I3D.01,subd.3; Before closing a meeting under any of the following exceptions,the public
13D.04,subd.5;See The Free
Dress co,,,,r, o/Blue Earth. body must state on the record the specific grounds that permit the meeting
677 N.W.2d 471 (Minn.Ct. to be closed and describe the subject to be discussed. The same notice
App.20041(holding that the requirements that apply to open meetings also apply to closed meetings.
county's statement that it was
closing a meeting under the
attorney-client privilege to
discuss"pending litigation"did
not satisfy the requirement of
describing the subject to be
discussed at the closed
meeting).
a. Labor negotiations
Minn.Stat.§ I3D.03,subd. I The city council may,by majority vote in a public meeting,decide to hold a
Ib1. closed meeting to consider its strategy for labor negotiations,including
negotiation strategies or developments,or discussion of labor-negotiation
proposals. The council must announce the time and place of the closed
meeting at the public meeting.
Minn.Stat.* 13D.03,subds. 1 After the closed meeting, a written record of all members of the city
Id),2. council and all other people present must be available to the public. The
council must tape-record the proceedings at city expense,and preserve the
tape for two years after signing the contract. The tape-recording must be
available to the public after all labor contracts are signed for the current
budget period.
Minn.Stat.§ 13D.03,subd.3. If someone claims the council conducted public business other than labor
negotiations at the closed meeting,a court must privately review the
recording of the meeting. If the court finds the law was not violated,the
action must be dismissed and the recording sealed and preserved. If the
court determines a violation of the open meeting law may exist,the
recording may be introduced at trial in its entirety,subject to any protective
orders requested by either party and deemed appropriate by the court.
b. Not-public data
Minn.Stat.§ 13D.05,subd.2. The general rule is that meetings cannot be closed to discuss data that are
not public under the Government Data Practices Act. A meeting must be
closed,however,if certain not-public data is discussed.
For example,any portion of a meeting must be closed if expressly required
by law or if any of the following types of not-public data are discussed:
• Data that would identify victims or reporters of criminal sexual
conduct,domestic abuse,or maltreatment of minors or vulnerable
adults.
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• Active investigative data created by a law enforcement agency,or
internal-affairs data relating to allegations of law enforcement
personnel misconduct.
• Educational,health,medical,welfare or mental-health data that are not
public data.
Minn.Stat. I3D.05,subd. 1 Other not-public data may be discussed at an open meeting without liability
il'1't`l or penalty if the disclosure relates to a matter within the scope of the public
body's authority,and is reasonably necessary to conduct the business or
agenda item before the public body. The public body,however,should
make reasonable efforts to protect the data from disclosure. Data discussed
at an open meeting retains its original classification,however,a record of
the meeting shall be public.
c. Misconduct allegations or charges
Minn.Stat.§ 13D.05,subd.2 A public body must close one or more meetings for"preliminary
1bi' consideration"of allegations or charges of misconduct against an individual
subject to its authority. If the members conclude discipline of any nature
may be warranted,further meetings or hearings relating to the specific
charges or allegations that are held after that conclusion is reached must be
open. This type of meeting must be open at the request of the individual
who is the subject of the meeting.
d. Performance evaluations
Minn.Stat.§ 13D.05,subd.3 A public body may close a meeting to evaluate the performance of an
(a);and See"Employee Discipline individual who is subject to its authority. publicbody The must identifythe
and the Open Meeting Law,"
Minnesota Cities,Sept.1997 for individual to be evaluated prior to closing the meeting. At its next open
more information. meeting,the public body shall summarize its conclusions regarding the
evaluation. This type of meeting must be open at the request of the
individual who is the subject of the meeting.
e. Attorney-client privilege
Minn.Stat.§ 13D.05,subd.3 A meeting may be closed if permitted by the attorney-client privilege.
]b). Meetings between a governmental body and its attorney to discuss active or
Brainerd Daily Dispatch,PLC threatened litigation mayonlybe closed,under the attorney-client privilege,
v.Dehen,693 N.W.2d 435 g Y P g
(Minn.Ct.App.2005);Prior when a balancing of the purposes served by the attorney-client privilege
Lake American v.Mader,642 against those served by the open meeting law dictates the need for absolute
N.W.2d Northwest
729 Mica.2002); confidentiality. The need for absolute confidentialityshould relate to
Northwest Publications,Inc.v.
City of St.Paul,435 N.W.2d 64 litigation strategy,and will usually arise only after a substantive decision
(Minn.Ct.App. 1989); on the underlying matter has already been made. This privilege may not be
Minneapolis Star&Tribune v.
Housing and Redevelopment abused to suppress public observations of the decision-making process,and
Authority in and for the City of does not include situations where the council will be receiving general legal
Minneapolis,251 N.W.2d 620 opinions and advice on the strengths and weaknesses of a proposed
(1976). p p p
underlying action that may give rise to future litigation.
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CHAPTER 7
f. Purchase or sale of real or personal property
Minn.Stat.§ 13D.05,subd.3 A public body may close a meeting to:
1c1.
• Determine the asking price for real or personal property to be sold by
the public body.
See Minn.Stat.§ 13.44,subd.3. • Review confidential or nonpublic appraisal data.
• Develop or consider offers or counteroffers for the purchase or sale of
real or personal property.
Minn.Stat.§ 13D.05,subd.3 Before holding a closed meeting under this exception,the public body must
1c1 identify on the record the particular real or personal property that is the
subject of the closed meeting. The meeting must be tape-recorded. The
recording must be preserved for eight years and must be made available to
the public after all real or personal property discussed at the meeting has
been purchased or sold or after the public body has abandoned the purchase
or sale. The real or personal property that is being discussed must be
identified on the tape.A list of members and all other persons present at the
closed meeting must be made available to the public after the closed
meeting. The actual purchase or sale of the real or personal property must
be approved at an open meeting,and the purchase or sale price is public
data.
g. Security reports
Minn.Stat.§ 13D.05,subd.3 Meetings may be closed to receive security briefings and reports,to discuss
]dl. issues related to security systems,to discuss emergency-response
procedures and to discuss security deficiencies in or recommendations
regarding public services,infrastructure,and facilities,if disclosure of the
information would pose a danger to public safety or compromise security
procedures or responses. Financial issues related to security matters must
be discussed and all related financial decisions must be made at an open
meeting. Before closing a meeting under this exception,the public body
must when describing the subject to be discussed,refer to the facilities,
systems,procedures,services,or infrastructures to be considered during the
closed meeting. The closed meeting must be tape-recorded,and the
recording must be preserved for at least four years.
5. Penalties
Minn.Stat.§ I3D.06,subd. I. Any person who intentionally violates the open meeting law is subject to
personal liability in the form of a civil penalty of up to$300 for a single
Claude v.Collins,518 N.W.2d occurrence. The public body may not pay the penalty. A court may take
836(Minn. 1994). into account a council member's time and experience in office to determine
the amount of the civil penalty.
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Minn.Stat. 13D.06,suhd,2. An action to enforce this penalty may be brought by any person in any
court of competent jurisdiction where the administrative office of the
governing body is located.
Minn.Stat. 13D.06,suhd.4; The court may also award reasonable costs, disbursements,and attorney
See LMCIT Risk Management memo,memo,Open fees of up to$13,000 to any party in an action alleging a violation of the
Aferi,tg La„ DcJ',tse co,rrage, open meeting law. The court may award costs and attorney fees to a
for information about insurance defendant only if the action is found to be frivolous and without merit. A
coverage for open-meeting-law
violations. public body may pay any costs,disbursements or attorney fees incurred by
or awarded against any of its members.
Minn.stilt.§ 13D.06,suhd.4 No monetary penalties or attorney fees may be awarded against a member
(d);Coo/well I. A9urrar.No.
C6-95-2436(Minn.Ct.App. of a public body unless the court finds there was a specific intent to violate
Aug 6, 1996)(unpublished the open meeting law.
decision).
Minn.Stat.` 13D.06,subd.3 If a person is found to have intentionally violated the open meeting law in
(a). three or more actions involving the same governing body,that person must
forfeit any further right to serve on the governing body or in any other
capacity with the public body for a period of time equal to the term of
office the person was serving.
Minn.Stat.§ 13D.06. If a court finds a separate,third violation that is unrelated to the previous
suhd.3(h). violations,it must declare the position vacant and notify the appointing
authority or clerk of the governing body. As soon as practicable,the
appointing authority or governing body shall fill the position as in the case
of any other vacancy.
Minn.cons`.art. VIII. 5. Under the Minnesota Constitution,the Legislature may provide for the
Jacobsen v.Nagel,255 Minn. removal of public officials for malfeasance or nonfeasance. To constitute
300,96 N.W.2d 569(Minn. malfeasance or nonfeasance,a public official's conduct must affect the
1959).
performance of official duties and must relate to something of a substantial
nature directly affecting the rights and interests of the public.
Jacobsen v.Nagel,255 Minn. "Malfeasance"refers to evil conduct or an illegal deed. "Nonfeasance"is
195 );Claude
v 569(Minn. described as neglect or refusal,without sufficient excuse,to perform what
1959);Claude v.Collins,518 g
N.W.2d 836(Minn.1994). is a public officer's legal duty to perform. More likely than not,a violation
of the open meeting law would be in the nature of nonfeasance. Although
good faith does not nullify an open-meeting-law violation,good faith is
relevant in determining whether a violation amounts to nonfeasance.
Sullivan v.Credit River Minnesota courts have generally refused to invalidate the actions taken at
Township,299 Minn. 170,217 an improperlyclosed meeting.
502(Minn.1974);In re
D&A Truck Line,Inc.,524
N.W.2d 1(Minn.Ct.App.
1994);Lac Oui Parle-)'cllour
Bank N"atershed Dist v.
If ollsehlagcr.No.C6-96-1023
(Minn.Ct.App.Nov. 12. 1996)
(unpublished decision).
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TECH WINDOW
Open MeetingLaw and Electronic Communications
By Ann Gergen
-mail correspondence can be an Another is through written correspon-
dence,or conference calls. These members participate in a listsery or any
officials to violate the Minnesota scenarios would create concern if the chatroom sort of forum.Because these
open meeting law(OML),Minn. group discussed city business. distribution lists may include a quorum
Stat.§13D. Cities should imple-
ment E-mail makes a serial meeting easier of the council, one councihnember's
policies related to how and by allowing council or committee comments will be viewed by other
f when councilmembers or corn- members to forward messages. Imagine members. If the topic has to do with
mittee members are allowed to one councilmember e-mailing another city business and another councilmember
communicate through e-mail or other to suggest the pros and cons of a particular replies to the listserv,it could prove
electronic means as a way to avoid city decision.The recipient forwards the problematic under the OML. Again,
violating the law and incurring penalties. e-mail,along with his or her comments the city might consider a"no reply"
The basic requirement of the OML and interpretations.Even if the last rule,or perhaps have council-members
is that meetings of at least a quorum of councilmember to receive the e-mail send ideas for postings or responses to
the city council or one of its committees doesn't reply,the three members have the clerk or administrator to manage.
to discuss city business must be publicized discussed city business outside a public Remember,too,that official city
and open to the public,subject to a few forum.A violation could be found committees are subject to the same
exceptions.A primary purpose of the where serial e-mailing is used to reach open meeting requirements and should
law is to ensure deliberations about city a decision. be similarly educated about correct
business take place publicly,followed Many cities are moving toward e-mail use.
by a final and public decision. electronic meeting packets,often sent Regardless of precautions,there may
The law applies to any discussion via e-mail attachment. This one-way be times when councilmembers find
about city business, not just voting or distribution of information is fine in themselves accused of violating the OML,
official actions, and to any gathering of terms of the OML. City officials should perhaps by unintentionally engaging in
a quorum of the council or committee. start to get concerned,though,when one of these sorts of conversations. One
In most cities,a quorum is three or one or more councilmembers"reply to way to diffuse concern is to immediately
more council or committee members. all"to respond to the content of the release copies of all e-mail correspon-
Violating the OML carries with it materials,or otherwise begin an e-mail dence to anyone who wants to see it.
penalties,including personal liability discussion about the packet.This can While this doesn't negate the possible
for up to$300 per occurrence and begin to look a lot like non-public violation,it shows good faith and lack
forfeiture of office for officials who discussion of city business. of specific intent to violate the law.
intentionally violate the law three One suggestion is that councilmembers E-mail exchanges tend to be treated
times. Reasonable costs and attorney never communicate to one-another less formally than other written cone-
fees can also be awarded if the court using e-mail,but instead treat e-mail as spondence or in-person meetings,but
finds specific intent to violate the law. a way to receive information from the create the same sorts of open meeting
The OML has a number of tricky clerk or administrator. If a council- concerns. It's important to educate
aspects—not the least of which results member has information to share via city elected officials about the OML
from increasing reliance on e-mail e-mail,he or she might send it to the requirements and provide guidelines
communication between council or clerk and ask for it to be distributed by for e-mail exchanges. If you'd like
committee members. the clerk to everyone else (by e-mail additional information, check with your
It's easy to imagine where a quorum or in paper form). Using the clerk for city attorney or contact the League.
might gather—coffee at the local cafe, information distribution is probably a
pre- or post-meeting discussions,or a safer alternative than councilmembers
community celebration are all common communicating directly by e-mail.
spots for councilmembers to meet.There If councilmembers are engaged in
are also some not-so-obvious ways a e-mail discussions,it's wise to do so
quorum might meet,for instance in a only between two members.A"no Ann Gergen is technology services director
serial meeting. Councilmember A talks forwarding"rule might be a good way with the League of Minnesota Cities.
to councilmember B,B talks to to ensure the OML isn't unintentionally Phone: (651) 281-1291. E-mail:
councilmember C,and C talks to A. violated through e-mail. agergen@lmnc.org.
OCTOBER 2004 MINNESOTA CITIES 25