To:

Mayor and City Council

From:

Darin Nelson, Finance Director

cc:

Bill Reynolds, City Administrator

Date:

December 6, 2016

Re:

2017 Budget and 2016 Amended Final Budget

Introduction
Presented is the 2017 budget along with the amended final 2016 budget.
Background
The City of Shakopee annually adopts a General fund budget and property tax levy for the upcoming
year. The following information provides an overview of many elements that have been brought into
the budget process during 2016, planning for the 2017 budget year.
Earlier this summer, staff kicked off the 2017 budget process by reviewing with Council a preliminary
Capital Improvement Plan for 2017-2021. An updated final version is included with the 2017 budget
document. In September, the Council approved the preliminary tax levy. The preliminary tax levy was
used to prioritize, size and shape the 2017 budget.
Just as Administrator Reynolds has been reiterating over the past year, the budget process will
experience significant changes over the course of the next couple years in order to provide complete
transparency and accountability for city-wide operations and to ensure future sustainability. Not all the
changes will happen this year, but there are changes taking place this year to better position ourselves
for future changes.
For example, the budget calendar has been modified to condense the budget process and move it closer
to year-end. In years past, the detail budget document was completed in the summer, which makes
forecasting difficult due to the time gap before the new year begins. Another major change to note with
the 2017 budget is the inclusion of a Revised 2016 Budget. The revised budget serves as the citys final
budget for the year. Due to the general nature of budget forecasting, unforeseen circumstances can
now be accounted for with a final revised budget. This final budget neither impacts the levy nor taxes
payable in the current year, it only accounts for positive or negative variances in revenues and
expenditures.
These are two of the more noticeable or structural type changes taking place this year. In the next year
expect the budget to begin transforming into more narrative form. Numbers are important to a budget,

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but without context or more simply stated a story, numbers tend to not mean much to most readers of
the citys budget.
Overview
To put this budget in context, we have lots to be thankful for. The city continues to grow with
construction permits strong. Our tax capacity is high in comparison to our tax levy. We have some
flexibility in our overall budget due to past variances (the differences between revenue and
expenditures). And we have completed several bond initiatives. The implementation of franchise fees
on private utilities will also aid in diversifying our revenue base.
That does not mean that we do not have significant challenges this year. The effect of the school district
tax increase was more than many of our citizens anticipated leading to some distrust of what we will
bring to the table this year. The filling of many of our open positions and the tightening of our budget
will decrease future options as we decrease variances. We have a sizable bond for $29.5 million added
to our balance sheet. And finally, we have significant operational expense increases ahead for the
community center and ice arena.
Staff began the budgeting process with the knowledge and direction that the fiscal conservation was
prudent and necessary in a year that will see a $29.5 million community center and ice arena expansion
coming on-line. The annual debt service payments on this facility are $2.1 million. That being said, the
2017 budget should be considered a proud accomplishment by the City Council and staff.
Tax Levy
The 2017 budget seeks a tax levy increase of $1,316,146 or 7.47%. This increase is fully directed
towards existing and new debt service. In fact, the Citys net debt service payments are increasing by
$1.4 million, or almost $100,000 more than the entire levy increase. The debt service levies include the
first years debt service payment on the Community Center and Ice Arena expansions.
Other levy changes to include:
Abatement levies have been isolated. In prior years, private development abatements have
been included in the General Fund levy. Isolating these abatements provides for increased
transparency.
The Capital Improvement Fund (CIF) now has a dedicated levy of $385,000. In years past, an
annual transfer was made from the General Fund to the CIF. This transfer has now been
eliminated. The 2016 transfer was $1.2 million. Franchise fee collections in 2017 are dedicated
to the CIF to account for the difference between the dedicated levy and the prior years
transfers.
The following table is a comparison between the 2016 levy and the 2017 proposed levy.

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2016 Levy

2017 Proposed
Levy

Increase /
Decrease

$ 16,825,900

$ 16,175,900

Abatements

174,915

174,915

100.00%

Capital Improvement Fund

385,000

385,000

100.00%

2004B

238,027

(238,027)

-100.00%

2006B

315,390

(315,390)

-100.00%

2007B

94,992

92,471

(2,521)

-2.65%

2008A

148,800

2010A

88,500

107,145

2012A

47,386

2016A

% Change

Base Levy
General fund

(650,000)

-3.86%

Debt Service

Total Property Taxes

$ 17,610,195

148,800

1,842,110
$ 18,926,341

100.00%

18,645

21.07%

(47,386)

100.00%

1,842,110

100.00%

1,316,146

7.47%

Tax Impact
Scott County has provided staff with tax impact estimates for residential homestead properties.
Residential property values held virtually steady from January 1, 2015 to January 1, 2016. The value of
an average market value home in Shakopee actually decreased slightly from $229,700 to $229,100. In
the meantime, the City experienced an eight percent increase in tax capacity for taxes payable in 2017.
This increased tax capacity allows the tax rate to rise only 0.324 percent with a 7.47 percent levy
increase. An average value home in Shakopee will see a small reduction of $9.49 or 1.2 percent in city
taxes. The chart below provides a comparison of the 2016 levy and the preliminary 2017 levy for an
average valued home.
Avg Market
Value
2016
Shakopee

Avg Market Taxable %

Value
Change
2017
16 vs 17

229,700 $ 229,100

Net
Payable
2016

-0.31% $ 821.71

Net
Payable
2017
$ 812.23 $

Net
Inc/Dec
16 vs 17

Net
Difference
% Change

(9.49)

-1.2%

Obviously not all properties fall into the average market value category. A home valued at $150,000 will
see an estimated annual city tax increase of $4. Whereas, a home valued at $325,000 will see an
estimated annual city tax decrease of $31. On the following page is a table classifying all the citys
residential properties by market value. Each range of value includes the number of properties in the
range and the average change in market value from taxes payable 2016 to taxes payable 2017. The
table indicates that lower value home were stable or increased slightly in value and higher valued homes
experienced a decrease in value.

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Late this summer, staff did research to determine if the set of cities that Shakopee has considered
comparable in the past were still comparable today. Shakopee has experienced significant growth over
the past decade and has a large commercial and industrial base. A comparison of cities based on various
attributes such as population, fiscal disparity contributions and net fiscal disparities, employees, and
General Fund expenditures were analyzed to determine a set of comparable cities. Directors and key
leaders reviewed the analytical results and narrowed the list to ten based off of subject understanding
of comparable cities.
Below is a comparison of the preliminary levy increases for this new set of comparable cities. It should
be noted that Golden Valleys preliminary levy includes funding for a bond issuance for the building of a
$18.2 million community center.

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Budget Impact Issues

Wages and benefits
Union contracts expire on December 31, 2016. The budget has been built with an assumption of a 3
percent increase in wages. Comparable cities are indicating that cost of living adjustments are averaging
closer to 2.50 to 2.75 percent. Union negotiations are likely to begin later this fall. The General Fund
impact of a 3 percent COLA is approximately $387,000
Health insurance has been budgeted at a 10 percent increase. After receiving initial rate increase
estimates of 10.5 to 14 percent, our insurance broker negotiated a final rate increase of 10 percent. The
city did experience a reduction in health insurance last year. A ten percent increase in health insurance
is approximately $107,800.
No other benefit changes are anticipated or legislated for the upcoming year.
Four new staff positions have been requested for 2017, one by the Police Department for a non-sworn
investigative aid/crime analyst, and three by the Parks and Recreation Department. The three new
positions requested by Parks and Recreation are due to the expansion of the community center and ice
arena. The budget impact of these four position is $183,800.
Internal Charges
As was discussed at the CIP work session in July, staff was proposing restoring building, park asset, and
equipment rents to full funding. Rents were decreased by 20 percent back in 2014. There is a need to
restore the rents to full funding to ensure long-term financial sustainability. The rent reduction doesnt
have an immediate impact on sustainability, but over the long-term financing becomes problematic.
Council directed staff to restore full-funding for park assets in 2017 and to phase in full funding for
equipment and buildings over two years. Restoring rents to full funding adds an additional $663,000 to
the General Fund budget, by phasing in equipment and building rents the impact is reduced by about
$165,000.
Other Services & Charges
Other than personnel, internal charges, and liability insurance, departments within the General Fund
were held to a zero percent increase on all other line items within their department/division budgets.
Department directors understood the need for a balanced budget, but were also aware of the financial
pressure the community center and ice arena expansion will have on operations. Several divisions
within the General Fund reduced the needed budget allotment without sacrificing services or service
levels, resulting in savings that could be redirected and aid in balancing the budget. This commitment to
the city proved invaluable in creating a balanced and fiscally responsible budget.
Economic Development Authority
An appropriation of $500,000 for the downtown has been included in the budget. 2017 is the third year
of the originally anticipated transfer of $1.5 million over the course of three years.
The exterior grant program has a balance of $264,000 as of August 31, 2016. Rather than transfer an
additional $200,000 to this program from the General Fund, staff is allocating $130,000 from the

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Revolving Loan Fund that has been inactive for the last several years. There is approximately $260,000
in this fund. This fund was created with a transfer of $100,000 from the EDA fund back in 2004.
Debt Service
As mentioned earlier, the issuance of community center/ice arena tax abatement bonds in January of
this year does have a substantial impact on the levy. Debt service payments are approximately $2.1
million annually. Due to available fund balances in existing debt service funds and the structuring of the
tax abatement bonds, the annual impact of all existing debt service funds will hold steady at about $2.1
million annually.
Internal Service Funds
New for 2016 is the creation of a Self-Insurance Fund. As part of the citys annual general liability
insurance renewal, claim deductibles were analyzed as part of the process. Historically, city deductibles
have been extremely low for a city our size. The current deductible was $2,500 per claim. In reviewing
the average claim losses for the past several years, it was determined the city can afford to increase its
deductible in order to benefit from substantial savings on premiums.
Increasing the deductible to $50,000 per claim is anticipated to save the city $150,000. Average claims
over the last five years have average about $50,000 per year, which results in a net annual savings of
$100,000 per year. Due to the timing of our insurance renewal, the city will be able to realize about
$125,000 in savings for 2016, which is due in part to lower actual claims for 2016. 2017 premium
savings are split between realized savings and continued funding of the self-insurance fund.
The goal of the self-insurance fund is to take on the role of risk management. By establishing an
appropriate fund balance, the city can cover claims to a certain point while realizing the benefit of
reduced premiums. The long-term goal is a move towards self-insurance.
Enterprise Funds
Both the Sanitary Sewer and Surface Water Funds implemented rate increases as of January 1, 2016. In
a budget work session held back in July 2015, Council and staff reviewed the need for multi-year rate
increases for the Sanitary Sewer Fund. The flow rate charged per thousand gallons is not keeping pace
with the Met Council Environmental Services (MCES) service charge. For example, the flow rate revenue
for 2015 was approximately $2.16 million and the MCES charge was $2.4 million. A deficit of $240,000.
The MCES charge accounts for about 75 percent of the Sanitary Sewer Funds operational expenses. On
top of the $240,000 MCES deficit is an additional 25 percent or $600,000 of operational expenses, which
increases the annual operating deficit to $840,000.
MCES has and will continue to be increasing service charge rates at about a 5.5 percent annually for next
three to five years. As with most cities, the cost of maintaining and reconstructing aging infrastructure is
an expensive but necessary endeavor.
The Sanitary Sewer Fund also charges a flat $6 monthly fee per account. This generates about $665,000
annually. These flat fees are intended to fund our capital outlay for costs associated with street
reconstructions, sewer linings, etc. A good measuring tool to indicate whether the flat fee is keeping
pace with the citys needs is comparing the flat fee to the annual depreciation expense. Annual
depreciation is about $760,000.

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This news doesnt reflect that the sky is falling. The Sewer Fund does have a healthy cash balance.
However, operational deficit spending year after year will eat away at those reserves rather quickly.
Staff plans to do an in-depth rate analysis in 2017 that will review several factors including; what is an
appropriate fund balance, long-term forecasting (10-20 years), impact of new development, etc.
For 2017, the budget has been prepared with an 8 percent increase in the flow rate from $2.24 to $2.41
per thousand, and a $0.50 increase in the flat rate from $6.00 to $6.50. For an average home utilizing
6,000 gallons of water a month, the increase will amount to about $1.52 per month. Even with this
increase Shakopees sanitary sewer rate remains one of the lowest in the metro. Below is a chart
comparing our comparable and neighboring cities 2016 annual sanitary sewer costs to Shakopee. Even
with a rate increase for 2017, Shakopee will still maintain one of the lowest sanitary sewer costs.

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Next Steps
The City Council approved the increase in 2017 sanitary sewer rates at its November 15, 2016 meeting. The
draft 2017 budget reviewed by council at a work session in November remains virtually unchanged except for
a few minor changes including:

Separating building and park rent payments within the Park Maintenance division. The original draft
budget had these two expenditures combined into one lump sum.

Reallocating $3,000 from within the Administration budget from the Communications division to the
Personnel division. This is a budget neutral change.

Editing a few budget comments and typos.

The December 6 Council meeting provides an opportunity for the public to comment on the levy and budget.
At the subsequent council meeting on December 20, the council will be asked to certify the final tax levy and
adopt the 2017 budget document.
Conclusion
The preparation of the annual budget is probably the single most important activity of the City, short of actual
provision of services. The city remains committed to providing efficient municipal services to its residents,
property owners, and other stake holders.

Darin Nelson
Finance Director

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