Tax base sharing in the twin cities of minnesota

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underwriters’ spread; counsel and financial advisor fees; rating agency and trustee fees; paying agent fees; ac- countant fees; printing costs; and fea- sibility studies. This amount is increased to 3.5 percent in the case of issues of mortgage revenue bonds but cannot exceed $20 million.

Information Reporting State and local governments are re-

quired to send an information report to the U.S. Treasury similar to present reporting requirement on IDBs for all

tax-exempt bonds issued after Decem- ber, 1986. Individuals will be required to report tax-exempt interest on federal income tax returns filed after De- cember 31, 1987.

D. L.

This summary of The Tax Reform Act of 1986 came from several publications, most especially a special bulletin of the Govern- ment Finance Oficers Association (1750 K St., Suite 200, Washington, DC 20006), Tax Reform Act of 1986: Major Provisions Affecting rhe Tax-Exempt Securities Mar- ket.

Tax Base Sharing in the Twin Cities of Minnesota

By James L. Hetland, Jr.

HE problem that the Twin Cities T Metropolitan Area addressed with its Tax Base Sharing Law was canni- balism. A cannibalistic competition had emerged among the 120 local governments that sought attractive new commercial or industrial real estate development to increase their local real estate tax base. The competition became so intense that, for example, when Minneapolis found a potential new business development and had ap- propriately established the advantages of a Minneapolis location for the development, a St. Paul Committee would follow immediately and stress the disadvantages of Minneapolis and the advantages of a St. Paul location; then a suburban Chamber of Com- merce would visit and explain why core cities were bad locations and why

James L. Hetland, Jr. is senior vice presi- dent and general counsel of the First Bank of Minneapolis, and chairs the Met Council of Minneapolis.

a suburban location was most desir- able. The net effect, more often than not, was that the developer grew dis- enchanted with the Twin Cities and located the development in some other metropolitan area altogether.

Obviously we had a management problem in the Twin City area. What could be done to contain this internal economic suicide?

One solution seemed politically un- attainable-we knew that we could not restructure the 120 municipalities and 340 real estate tax units into a single metro area government covering all seven counties. A partial solution has been to move the responsibility for providing selected urban services such as highways, sewers, transit and air- ports to a multiple purpose metropolitan district. This is the basic design of the Metro Council in Minneapolis/ St. Paul, which relieves the local en- tities of budget responsibilities, per- mits regional coordination and by vir- tue of size, enables economies due to volume and to appropriate manage-

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development of equal value or if age reduces the assessed value of a development, the city will not be required to share the value of its new commercial/industrial development. A county finance officer is designated as the administrator to total the net increase from each local unit and determine what will be returned to the jurisdic- tion. The formula for return is based on the local unit’s population divided by its total assessed real estate value including residential property or a per capita value. Those areas with high population density and low real estate assessed values are major winners while those with high value and low population are likely losers. How are real dollars obtained from

this artificial assignment of tax base? Each community, including schools, counties, municipalities and special service districts, sets its own local mill rate for real estate taxes as determined by local budget decisions. This mill rate applies to residential property as well as commercial or industrial development so local governments must see that the mill rate is fair and politically acceptable. Most importantly a community cannot gouge the regional base assigned to it. The dollars nec- essary to meet each local community tax use of its assigned tax base is ac- cumulated by the designated metropolitan area administrator and a metropolitan-blended rate for the tax base pool is determined. That rate is applied and blended with the local mill rate for the commercial/industrial property in each local unit. Within each local unit the tax paid by new and by old commercial/industrial property is the same but it is not necessarily the same between communities. The commercial/industrial rate for each community has two parts, the pool rate and the local rate. It sounds complex, but after the first year it works very easily.

What are the results? The commer-

ment and development policies. A third solution is to place land use and development timetables in the hands of a regional agency. Unfortunately this is rightly perceived by local government as placing life and death em- nomic power over local government in the hands of persons not elected from that geographic area or foreign to that area. So long as local governments rely on local real estate tax revenue to ti- nance their service needs, local governments will not, without other com- pensation, agree to relinquish development controls.

A fourth possibility is to place all real estate taxing authority in the hands of a metro agency. Local governments reject this as removing their local authority to set local budgets and service levels and local real estate tax rates. A new metropolitan-level tax is clearly not the answer to this problem either. The solution in the Minneap- olis/St. Paul Metro area has been the Metropolitan Tax Base Sharing Law adopted in the Twin Cities in 1971.

What is shared? We share on a metropolitan basis the net increase in commercial/industrial development in each local government unit over base year 197 1. By establishing a base year, each local government is assured that they will not lose their existing real estate tax base. Forty percent of the net increase in commercial/industrial assessed value is shared and 60% is retained by the local government where the development occurs. Those proportions were based on a political guess of the cost of providing both lo- :a1 services to the development and an incentive for future development. How does it work? Each year each

municipality or local unit reports the net increase in assessed value in com- aercial/industrial property over the messed value in 197 1. A key word is ‘net.” This means that if existing com- nercial or industrial property is tom lown and is merely replaced with a

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cial/industrial tax base disparity between the 120 communities in the Twin City area has been reduced from a 15 to 1 ratio to a 4 to 1. This means the competitive advantage to attract development through lower real estate taxes between local communities has been substantially reduced. Tax rates are becoming more even in all communities. Development magnets such as a new airport, a new zoo, a community college or a highway can be placed with reduced political opposi- tion. Not all competition has disap- peared because the retained 60% is still perceived as a local incentive. The law has successfully withstood two constitutional challenges and seven different legislative challenges where proposals to change, abolish, or to per- mit exemptions for certain development were advanced.

Who has won and who has lost? The net commerciaVindustrial assessed value increase in 1985 was $4.5 billion over the base year ($1 1 billion in actual market value) with $1.8 billion in assessed value in the metropolitan pool. From 1971 to 1983, Minneapolis and St. Paul each were net receivers of tax base as the central city renewal took place. In 1983, 1984, 1985, and 1986 Minneapolis has been a net giver of tax base, paying about $9.6 million in 1986. St. Paul remains a net receiver of tax base (about $9.5 million in 1986). First-ring suburbs have become net receivers and third-tier suburbs have become net givers. The top local giver gave $2,984 of assessed value per capita; Minneapolis gave $267 per capita. Is Minneapolis complaining about being a net giver? No! The surest sign of a healthy economy is to be a net giver.

Are any changes contemplated? There has been talk about revising the 60-40 formula. Ultimately, more than 40% of the tax base is likely to be in the pool; the shared base has already risen from 5% to 29% in the 15 years

since the law was enacted. A change of the base year to provide better eq- uity for newer suburbs has also been suggested.

Exemption? No! Include residential development? No! Residential values are the basis for integrity in the real estate tax system as each taxing entity, school system, and city council sets its budget with the knowledge that home- owners will pay the same tax rates as commercial/industrial property. The only real change needed is more eq- uitable appraisals to determine market values in each community.

The magic of sharing tax base rather than revenue is that the tax base needs no legislative appropriation or voter approval to grow each tax year.

By con t rohg local economic competition for commerciaVindustria1 development, it is possible to control leapfrog development and premature demands on the urban infrastructure. If local governments are reluctant to adopt changes that involve loss of local autonomy, let's concentrate on man- aging our urban regions effectively. A major tool in such management is re- ducing the competition for local commercial real estate development by providing each community with the revenue value of commercial/industrial developments that occur else- where in the metropolitan area.

The Business of Government In 1976, the first set of Consolidated

Financial Statements (CFS) was prepared in an attempt to apply the principles of business accounting to the business of government. The 11th set of statements, with FY'85 results, has just been released by the Treasury De- partment.

The CFS is unique to the array of Federal financial reports because the

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statements are prepared in accordance with generally accepted accounting principles (GAAP); however, the CFS has remained a prototype document since 1976, as GAAP reports are not prepared by all Federal agencies.

The data in the statements is selected from agency reports to the Treasury and augmented by calcula- tions of accrual amounts for categories not maintained on an accrual basis in agency accounting systems.

In addition to the Statement of Fi- nancial Position, Statement of Oper- ations, and Statement of Changes in Financial Position, the report recon- ciles cash receipts and outlays to the accrual operating results, and high- lights significant items through sup- plemental narrative and graphic ma- terial.

CFS 1985,048-000-00387-7 may be purchased from the Superintendent of Documents, Government Printing Of- fice, Washington, DC 20002. ($2.)

SEC Ruling Overturned

Since 1982 banks have been allowed to offer retail discount-brokerage services to the general public through subsidiaries, after the Office of the Comptroller of the Currency aban- doned the view that the law limits banks' brokerage activities to customers of traditional banking services.

On July 12, 1985, the Security Ex- change Commission (SEC) published a rule requiring banks engaging in the securities brokerage business for profit to register as broker-dealers under the Securities Exchange Act of 1934. (The SEC was concerned that growing numbers of banks, which are not sub- ject to the SEC's investor protection oversight, were offering securities services to their customers.)

On November 4, 1986 the U.S. Court of Appeals held that the SEC did not have authority to regulate banks as broker-dealers and struck down the SEC ruling.

More Bank Failures Predicted

The Federal Deposit Insurance Corp. (FDIC) has estimated that between 150 and 160 insured banks could fail this year and the pace is likely to continue into next year. About 1,450 banks, 10 percent of the nation's total, are on the FDIC problem list; their assets represent less than 10 percent of the total U.S. bank as- set+ Historically about 10 percent of the banks placed on the problem list eventually fail and about one bank a day is being added to the list.

The FDIC's reserve fund will have been increased by more than a half billion dollars this year and is expected to total between $18.5 billion and $18.8 billion at the end of this year. William Seidman, the FDIC Chair- man, feels the reserve fund is large enough to handle the current level of bank failures.

An Explanation of Consumption Taxes

Tax Policy: Choosing Among Con- sumption Taxes, a staff study by GOA (GOA/GGD-86-91) describes three types of broad-based consumption taxes-a national retail sales tax, a value-added tax and a personnel ex- penditure tax-in terms that the lay person can understand.

A consumption tax is levied on a person's expenditures for goods and

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services. Among the consumption taxes in use are state and local retail sales taxes, and federal taxes on al- cohol, tobacco and petroleum prod- ucts.

To obtain the report, contact: GOA, Post OfFice Box 6015, Gaithersburg, MD 20877, (202) 275-6241.

Local Option Taxes in Massachusetts In July 1985 the Massachusetts leg-

islature authorized a local option tax-the first ever in the state-on hotel room occupancy and jet fuels. At the close of 1986, 61 cities and towns had adopted one of the taxes; Boston was the only community to adopt both and sixty other communities have adopted the room occupancy tax.

This option allows communities to collect a 4% levy for a room occupancy (in addition to the 5.7% state

charge) and to add a 5% tax to the average price of jet fuel.

The Nobel Prize Tax The new tax bill has established the

United States as the only country in the world that taxes the cash portion of the award Nobel laureates receive. This award is taxable as income unless the recipient donates the entire prize to a university or another institution dedicated to research.

Although the Nobel Prize is not sin- gled out in the tax bill, the award falls under the category of prizes and awards that, for the first time, would be considered taxable income.

In 1986 the cash value of the prizes totalled $289,855. In addition to the cash award, a spokeswoman at the Swedish Embassy said winners also receive a certificate and gold medal pre- sented by the King of Sweden-items that Uncle Sam won’t try to tax.

Council on Municipal Performance - National Municipal League

Fifth Annual Award Dinner

Honoring New York State Comptroller Edward V. Regan

Waldorf-Astoria Hotel, 6:30 p.m., May 13, 1987

For More Information Call 21 2-730-7930

Subscription $300.00