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August 8 2022 Budget Workshop2023 Budget/Levy Discussion August 8, 2022 –City Council Budget Workshop Tonight’s Discussion will focus on: •Review of Rough 2023 Draft Proposed Capital Investment Plan. •We are looking for City Council’s direction on spending priorities and the general direction you wish to take the tax levy and anticipated tax rate. •Consider if we may structure any debt into the capital outlay. •Guidance form today’s meeting will be used by staff and the Capital Investment Committee to amend the Plan to more closely fit the City Council’s objectives. How do we fund capital projects? 4 Common Sources for the Funding of Capital Projects: •Property Tax Levy •Fund Balance –Restricted, designated, or unrestricted funds that have been accumulated in a fund over time that is used to cover future capital projects and reserve funds for emergencies. •Grants/Intergovernmental Revenues –This is outside funding that is not derived from local property taxes and debt service. •Debt Service (Borrowing) -receiving money from creditors to be paid back over a set period of time. How do we fund capital projects? 4 Common Sources for the Funding of Sources: •Property Tax Levy •Fund Balance –Restricted, designated, or unrestricted funds that have been accumulated in a fund over time that is used to cover future capital projects and reserve funds for emergencies. •Grants/Intergovernmental Revenues –This is outside funding that is not derived from local property taxes and debt service. •Debt Service (Borrowing) -receiving money from creditors to be paid back over a set period of time. More broadly there is two basic funding approaches: Funding with available cash (pay-as-you-go) or debt financing (pay-as-you-use) When possible, the City uses cash for capital improvements within the financial affordability of each fund rather than issuing debt. Why consider issuing debt financing? •Debt financing is used when the capital assets or projects cannot be funded prudently from current revenues or fund balances. •Debt financing is also utilized to better ensure inter-generational equity by spreading payments for assets and infrastructure over their useful lives (Pay-as-you-use). Similar to taking out a mortgage to purchase a home that you intend to live in for a long time rather than emptying your savings to pay cash. •Debt is never used to fund or suplement operating expenses. •Negative carry –This occurs when funds are built up in reserve, but result in a loss of value due to any inflationary environment. For example many of our current deposits are receiving interest rates around 2-3 percent, but general inflation for this year increased 5.8%. This means the money has lost value in terms of purchasing power. This can weigh unfavorably, at times to cash funding. •Debt financing when applied thoughtfully cash funding (Pay-as-You-Go) budgets can be very effective. Why consider cash funding (pay-as-you-go) option? This is our primary project funding process because: *There is faster access to funding. * Self-funding a project without debt expense can yield cost savings. *Can be less politically challenged then considering debt, especially in economic down turns. *Is a better fit for projects with a more limited life span. Why what is the best option for preparing a CIP? •A good plan will thoughtfully incorporate cash payments, debt service, and expenditure delays so that we can most closely adhere to our taxing goals and carry out projects in a manner consistent with our spending goals. This means selectively and strategically determining which costs may work best with apply debt. This means using debt in a way that is limited and recognizes future needs and existing and projected financial limitations. •Last year’s capital budget included this option as one of the options. The mixed approach of utilizing cash payments with some debt, was the only plan that was able to balance your taxing goals with meeting the most project goals in the CIP. •Debt consideration later this year will be critical to carry out the Bliss Wastewater Project. ARPA Funds will help cover half of the project’s costs, however, the Big Marine Sewer Fund lacks the approximate $500,000 needed to carry this project out in time to meet the MPCA’s deadline. •At year end,the City debt will be approximately $3,800,000 •The general rule in Minnesota is that the net debt should not be in excess of 3% of the estimated market value of al taxable property in the City. •Scandia’s estimated market value is $1,023,241,400 placing Scandia at approx. 0.3714% of the debt limit. Complications to consider for this year’s levy and tax rate •Property values this year has an average equalization change of 25% increase. •Additional property value increases will result in increased tax payments.