City of Rochester Minnesota 2022-2023 Operat i ng Budget
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City of Rochester 2022-2023 Operating Budget Annual Budget Of The City of Rochester, MN For the Fiscal Year Ending December 31, 2022 and 2023
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CITY OF ROCHESTER, MINNESOTA MISSION STATEMENT The mission of the City of Rochester is to provide a safe, attractive environment through the responsive, efficient and cost-effective delivery of municipal services. The City will strive to enhance community pride by improving the physical, environmental, economic, cultural and social quality of the community.
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Respect Integrity Safety Excellence Identify, plan for, and support customer needs Seek and consider input from our customers to continually improve services Treat every customer well Treat customers in a personal and professional manner while being firm, fair, and compassionate Be an active listener to the customer Maintain a work environment that is free of disrespect and false information Provide equitable and honest treatment to all customers Follow through in a timely manner or as communicated Maintain privacy and confidentiality as applicable to Minnesota State laws Be knowledgeable in my area of responsibility Be professional in my actions, manners and appearance Meet or exceed customer needs for City services RISE to the top of Customer Service Employees act responsibly and take ownership for their actions Documented safety procedures for employees and customers Communicate clearly when dealing with emergencies or safety concerns
City of Rochester 2022-2023 Operating Budget TABLE OF CONTENTS SECTION I -Transmittal and General Summaries Letter of Transmittal City Council’s Budget Priorities Summary of Means of Financing 2022 Summary of Means of Financing 2023 Summary of Budget by Fund and Character 2022 Summary of Budget by Fund and Character 2023 Budget Recapitulation of Expenditures 2022 Budget Recapitulation of Expenditures 2023 Trend Data by Object 2022 Trend Data by Object 2023 Frozen Positions SECTION II -Operating Expenditure Budget Details- All Funds -Operating Revenues- All Funds -General Fund City Council Mayor City Administration City Clerk Elections Parking Ticket Collections Administrative Fines Finance City Attorney Human Resources Community Development DSIC & North Station Maintenance Information Technology City Hall Maintenance Police Animal Control Dispatch Fire Community Development-Building Safety Flood Control Emergency Management Engineering
City of Rochester 2022-2023 Operating Budget Infrastructure Maintenance Administration Fleet Maintenance/PWTOC Building Traffic City Lighting Music Art Center/Civic Theater/125 Live Community Reinvestment Economic Development Administration CBD Maintenance Unallocated Contingency -Library -Municipal Recreation System Park and Recreation Administration Recreation Tennis Swimming Pools Parks Parkway Landscape Maintenance Plummer House F.E. Williams Golf Graham Arena National Volleyball Center Recreation Center -Mayo Civic Center -Airport Airport Operations US Customs -Mass Transit Administration -EDA Administration -Parking -Sanitary Sewer Wastewater Utility Sewer Fund Debt -Storm Water Utility -Rochester EDA
City of Rochester 2022-2023 Operating Budget -Operating Revenue SECTION III -Internal Service Detail 2022 -Internal Service Detail 2023 -Internal Service Detail - Revenues SECTION IV -Capital Improvement Budget – Summary 2022 -Capital Improvement Budget – Summary 2023 -Capital Improvement Budget – Revenues SECTION V -Debt Service Budget – Details 2022 -Debt Service Budget – Details 2023 -Debt Service Budget – Revenues SECTION VI -Decision Packages 2022 -Decision Packages 2023 SECTION VII -Additional Requested Decision Packages 2022 -Additional Requested Decision Packages 2023 SECTION VIII -Outside Agency Applications SECTION IX -Additional Requested Outside Agency Applications SECTION X -Six Year Forecast Summary
City of Rochester 2022-2023 Operating Budget SECTION XI -Rochester Public Utilities Operating Budget SECTION XII -Rochester Public Utilities Electric Utility SECTION XIII -Rochester Public Utilities Water Utility SECTION XIV -Rochester Public Utilities Personnel Budget SECTION XV -Rochester Public Utilities Supplemental SECTION XVI -Capital Improvement Plan Airport Parks Golf Recreation Center Graham Arena Mayo Civic Center Streets Traffic Pedestrian Facilities Mass Transit Parking Sewer and Water Storm Water Water Reclamation Flood Control Destination Medical Center Downtown Development/Tax Abatement District Fire Police Library Administration -Rochester Public Utilities Capital Improvement Plan Electric Water
City of Rochester 2022-2023 Operating Budget Appendix I -City Council Study Session Presentation – 3/22/2021 Appendix II -City Council Study Session Presentation – 4/19/2021 Appendix III -City Council Study Session Presentation – 6/28/2021 Appendix IV -City Council Study Session Presentation – 7/19/2021 Appendix V -City Council Study Session Presentation – 8/23/2021 Appendix VI -City Council Study Session Presentation – 8/30/2021 Appendix VII -City Council Study Session Presentation – 9/13/2021 Appendix VIII -City Council Study Session Presentation – 9/20/2021 Appendix IX -City Council Study Session Presentation – 11/8/2021 Appendix X -City Council Study Session Presentation – 12/6/2021 Other Supplemental Information
City of Rochester 2022-2023 Operating Budget Section I Budget Message, City Council’s Budget Priorities, and General Summaries
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December 8, 2022 Honorable Mayor and City Council Members, On behalf of our entire organization, I am pleased to provide you and the Rochester community with the Adopted 2022-2023 Operating Budget and 2022-2027 Capital Improvement Program (CIP). In total, the adopted 2022 budget includes expenditures of $509.4 million, of which $86.8 million is supported by the property tax levy. This includes $203.5 million in expenditures necessary to operate and maintain the Rochester Public Utilities (RPU) Water and Electric utilities. General Fund expenditures account for $101.2 million of the $509.4 million and the six-year CIP totals $719 million. This budget prioritizes supporting the necessary and needed City services while attempting to limit the ongoing COVID-19 financial impact to residents and businesses. On November 3, 2020, Rochester voters approved a $2 million per year property tax levy funded park referendum. This revenue is included in the budget. The use of park referendum dollars is still being finalized and therefore, a majority of these funds are not programmed in the 20222027 CIP. Once consensus is finalized on the approach to park investment, a budget amendment will be brought forward for City Council consideration. We are proud of the fact that the City Council and professional team came together to transition to a two year budget process, which provides opportunity in the second year to focus on policy initiatives and supplemental changes with the benefit of a second year baseline that is already forecast. During the budget review, the City Council decided to include the following revisions in the adopted budget. One Time Budgeted Contingency Items: Rochester Sports - $25,000 Automatic External Defibrillator (AED) Program - $156,000 Silver Lake Pool - $95,000 Community Funding Program - $34,740 o $20k in discretionary funds I wish to thank Rachel Houdek, Dale Martinson, Aaron Parrish, Noloan Schild and the Leadership and Finance Teams for their outstanding efforts in developing a budget that ensures we remain fiscally responsible, improve transparency, and enhance services. We also thank the community, as we continue to focus on making Rochester, MN a place where everyone can enjoy a high quality of life. Sincerely, Alison Zelms City Administrator
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BUDGET IN BRIEF 2022
ROCHESTERMN.GOV In an effort to ensure that the budget process is transparent, accessible and easily understood, the Budget in Brief was created for the first time in 2018. This document is intended to provide you with information about your City’s budget process. Included in the Budget in Brief are totals for revenues and expenditures. Also included in the Budget in Brief are facts about the various departmental budgets. It is important to note that the City of Rochester is able to maintain its positive financial condition and AAA credit rating due to the fiscally responsible actions taken in the prior years and by prudently investing in service level enhancements as resources allow. The 2022 budget represents a financial commitment to the vital and necessary services that our residents and businesses depend on. It also continues some prior year cost reductions, while prioritizing necessary strategic investments for a growing city. This includes leveraging Federal Rescue Plan dollars made available to mitigate the ongoing economic challenges and other impacts that COVID-19 presents to the community. As a steward of taxpayer dollars, the City of Rochester, MN prides itself on providing transparency and accountability in its budget. BUDGET IN BRIEF Rochester has received a Certificate of Achievement for Excellence in Financial Reporting for almost 50 years, the longest in the state of Minnesota. City of Financial Distinction The City of Rochester has a AAA Rating 1 BUDGET IN BRIEF Align resources with City Council strategic priorities Advance the City’s commitment to financial sustainability Prioritize both operating and capital expenditure The Goals of the Process are: Ensure sufficient revenues exist to deliver existing and proposed services and projects BUDGET PROCESS April-August Budget Development August Finance Department Prepares Budget September City Council Reviews Budget Documentation SeptemberDecember November City Council Finalizes Budget and Capital Improvement Plan • Public Engagement on Budget & Service Modifications • City Council Discusses Any Revisions to Recommended Budget April City Council adopts budget priorities September Team presents City Council with 2022 recommended operating budget & CIP September Max Levy Set - Adopt Preliminary Budget & CIP December Public Hearing & Adoption
ROCHESTERMN.GOV BUDGET IN BRIEF The 2022 adopted budget is $509,356,597 million. General Fund expenditures account for $101,228,240 million of the $509.4 million and the CIP totals $148,461,655 million. The six-year CIP totals $719.1 million. The inclusion of Rochester Public Utilities’ (RPU) budgets with all other City budgets is to ensure a comprehensive financial picture. It is included in the same document for the benefit of the Mayor, City Council, community, and Rochester team. 2 2022 ADOPTED BUDGET BUDGET FORMULA + = + Baseline Budget Service Modifications Capital Improvement Plan Budget 2022 $509.4 million Operations $343.5 million Debt Service $17.4 million Capital Improvement Plan $148.5 million City of Rochester Budget 2022, inclusive of RPU
ROCHESTERMN.GOV BUDGET IN BRIEF WHERE THE MONEY COMES FROM Tax dollars are accounted for in the General Fund, along with license fees, permit fees, state shared revenues, interest income, miscellaneous revenues, and prior year revenue. This portion of the budget is comprised largely of discretionary funds, since the Mayor and City Council can allocate the funds to programs and services in any area. There are few restrictions on how these resources may be allocated. The City cannot use fees collected from services for discretionary use. General fund dollars are used to support such City services as police and fire, as well as streets, community development and administrative support services. General Fund Enterprise, Special Revenue, Capital Improvement Plan, Airport, Debt, and Internal Service Fund 2022 Total Operating Revenue Inclusive of RPU The City of Rochester has a few different enterprise and special revenue funds. Enterprise funds are entirely funded through customer charges and do not require tax support. These include electric utility, water utility, sewer utility, storm water utility, and the parking fund. Special revenue funds are a combination of customer charges and taxes. These include: municipal recreation, library, and transit. As shown in the chart, the majority of funding for the City of Rochester budget comes from sources other than property taxes. Those taxes fund 17.04% of the total revenues. Items like charges for services, which are items like electricity, water, parking, and sewer fund the total budget by 47.44%. $101,228,240 million * Miscellaneous Revenues include: • Non Property Tax Debt Payment Revenue • Capital Improvement Program Revenues • In Lieu of Tax Enterprise Funds • Private Funds 3 $408,128,357 2022 Total Operating Revenue Inclusive of RPU
ROCHESTERMN.GOV Commercial/Industrial Property Olmsted County City of Rochester State of MN School District (535) 35.9% Average Residential Home School k-12 35.5% County 27.9% School District (535) .7% Olmsted County HRA Olmsted County City f Rochester Scho l District (535) Olmsted County HRA 3 .8 36.9% 28.1% 1.2% 28.7% 30.9% 21.4% 18.1% 1.0% General Fund Revenue $101,228,240 million BUDGET IN BRIEF PROPERTY TAX 4 In total, the City of Rochester receives $86.8 million from residential and commercial property tax. This reflects the 36.9% of residential and 30.9% of commercial property tax of the total portion paid by Rochester property taxpayers. Of the $86.8 million, 68% supports the General Fund, while 10.5% supports the Parks & Recreation department and 8.5% supports the Rochester Public Library. Olmsted County HRA 2022 Property Tax $86,823,881 million
ROCHESTERMN.GOV Overall, the adopted 2022 budget includes expenditures in six major categories for all funds. The largest being the CIP at $148.5 million dollars. Approximately 26% of the City’s total budget is invested in Employee Services, with a total of $130.8 million dollars. This expense is for the City’s full-time and part-time employees, which allows the City of Rochester to deliver high quality services. Approximately 71% is related to salaries, while 29% is related to benefits. 2022 Adopted Budget of $509,356,597 Inclusive of RPU • Police • Animal Control • Dispatch • Fire • Building Safety • Flood Control and Emergency Management • Mayor and City Council • City Administration • City Clerk • Elections • Administration Fines • Finance • Music Art City/ Civic Theatre/ 125 Live • Community Reinvestment •Development Administration • Economic Development • CBD • Unallocated Contingency WHERE DOES THE MONEY GO? • Engineering • Street Infrastructure • Fleet Maintenance • Traffic and City Lighting • City Attorney • Human Resources • Planning and Zoning • Information Technology • City Hall Maintenance BUDGET IN BRIEF General Fund Expense $101,228,240 5 Public Safety 58.1% Public Works 16.5% General Gov. 16.6% Other 8.8% Notable Capital Improvement Projects • District Energy System - $22.4 million (Total Project Cost $28.0 million) • Marion Road Substation - $20.3 million (Total Project Cost $30.6 million) • Bus Rapid Transit - $18.7 million (Total Project Cost $114.5 million) • Reconstruct 65th Street (phase 1)- $10.7 million (Total Project Cost $18.4 million) • Discovery Walk - $7.0 million (Total Project Cost $18.9 million)
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ROCHESTERMN.GOV BUDGET IN BRIEF 7 ROCHESTERMN.GOV Action Plan Organizational Vision Foundational Principles Strategic Priorities City Vision - Environmental Stewardship - Fiscal Responsibility & Sustainability - Public Safety - Social Equity - Compassion A vibrant, compassionate, innovative team. - Affordable Living - Quality City Services for Quality Living - Economic Vibrancy and Growth Management Rochester is a city that cares. Where all people are treated with dignity and respect. Where residents, employees, and visitors enjoy high quality of life. Where business and industry thrive, and where the land and environment are renewed and sustained for the benefit of all. It is a welcome and diverse community. Renowned for it’s reputation as a center for growth and innovation. Characterized by its safe and friendly neighborhoods. Committed to health and wellness for its people. Connected both physically and socially. Dedicated to the sustainable and responsible use of public resources. In order to achieve these priorities, the Council has committed to a legislative and process structure that emphasizes Strategic Governance and Inclusive Decision-Making: • Service delivery models consider partnerships where City is not always the leader • Decision-making is informed by citywide communication and engagement strategy with Diversity/Equity/Inclusion (DEI) at the forefront • Teammates create action plans/annual commitments aligned with Foundational Principles and Strategic Priorities • Policy and operational actions reflect equitable community investment Strategic Priority: Affordable Living Strategic Priority: Economic Vibrancy and Growth Management Strategic Priority: Quality Services for Quality Living Areas of Focus • Housing variety and affordability • Transportation options and access • Equitable regulatory landscape and creative incentives • Access to opportunities and amenities Areas of Focus • Create clarity, alignment and unity with economic development partners in defining city leadership and community values • Establish competitive and sustainable approach to effectively allocate DMC resources, Legislative allocations, and city revenue • Develop implementation tools and strategies for Comprehensive Plan to ensure current decisions reflect future projections • Adopt design guidelines that better reflect Council and community values Areas of Focus • Cultural and Recreational opportunities that provide access and equity • The organization and Services reflect changing demographics and needs identified by community • Operations are sustainable, integrated, and easy to navigate • Service delivery is optimized, cost effective, and reflect our Foundational Principles Action Plans will be developed to identify goals, actions and performance indicators that help advance priorities. VISION, PRINCIPLES, AND PRIORITIES
1 Honorable Mayor and City Counci lmembers, On behalf of the entire Rochester team, it is a privilege to present the recommended 2022-2023 Operating and 2022-2027 Capital Improvement Plan (CIP) budget. It has been a pleasure to join the City of Rochester and serve as your City Administrator these past eight months. For your consideration, the budget is the result of many teammates’ efforts to address the ongoing challenges our community has and continues to experience, while quantifying the magnitude of continued City revenue reductions. One key difference in the budget you will see here is that it is our first attempt at a two year operating budget. Once adopted, the 2022 budget will serve as the basis for spending and the 2023 budget will be the anticipated baseline for that year, with the ability to make final adjustments for updated forecasts and any additional strategic priorities. The 2022-2023 budget primarily focuses on rebuilding a structural balance to revenues and cost of service. It requires two years to accomplish this in order to mitigate the impact to property tax payers, while assuring a reasonable level of service through expenditure recovery and ongoing revenue to support service levels long term. The longer recovery period is necessary even with the use of budget stability funds to mitigate impacts. As was highlighted last year, the unanticipated financial effects of the COVID-19 pandemic have distressed the Rochester community and we are just beginning to see glimpses of what our new future holds. Individual community members, families, non-profit organizations, private business, and government services have all been impacted. We have been and continue to be focused on recovering with an emphasis on resiliency. As is the experience of private business, recovering service levels, meeting past and new needs of the community, and assuring a high quality of life is more costly after significant and unsustainable cost reductions are made. This challenge is amplified in an active, growing community, and it is crucial that we fund appropriate service levels that support economic vibrancy to position Rochester for optimal success into the future. What is the challenge that this budget is solving for? The immediacy of the COVID-19 economic shutdown required the City Council to approve $26.6 million in 2020 budget adjustments. This included significant expenditure reductions, use of contingency funds, and Federal Coronavirus Aid, Relief, and Economic Security Act (CARES) funds. The subsequent 2021 budget reduced another $5 million of spending (about half in General Fund operating expenses, the remainder in capital and other funds). Although capital projects were able to be repositioned, one-time expenditure adjustments and revenue sources create an ongoing capacity gap that must be closed over the course of 2022 and 2023 to meet community expectations. This funding gap occurs on top of the need to fund annual cost adjustments required by personnel contracts, and while we are still experiencing pressures on revenue sources. Although some reduced expenditures must return in 2022, in order to meet anticipated demands, numerous cost reductions remain in 2022 and are only recovered in the 2023 proposed baseline, less two positions that remain frozen going into 2024. Several service enhancements are also recommended in 2022, in order to position the city for the long term, reduce dependence on old systems, optimize our operation, and assure a sustainable cost structure for the future. The best example is deployment of a 311 Customer Service Line that we hope to have up and running by the end of 2023. This shift seeks to better deploy organizational wide resources to quickly respond to calls, track need, indicate trends, and stop the proliferation of additional teammates across service areas by centralizing the resource and creating a more effective response process. 2022 Budget Message
2022 BUDGET MESSAGE 2 To balance the impact of service recovery, the ongoing pandemic challenges facing the community and the City’s ability to deliver quality services during a time of need, the 2022 budget relies on a property tax increase and use of budget stability dollars to ease the cost to taxpayers over several years, while still assuring holistic budget and service stability. One of the goals was to avoid pushing structural imbalance past 2023. Notably, the recommended budget includes: • 6.5% tax levy increase • 2.5% general rate increase for Electric Utility customers with individual customer class increases ranging between 1% - 4% based on the 2020 Cost of service study recommendations. There is currently a proposed 2% reduction in wholesale power cost. This reduction will be passed through to the customer through the power cost adjustment. Upon review of final data by the RPU board it is anticipated that the rate increase will adjust downward • 2.5% general rate increase for the Water Utility customers and the adoption of Service Assured ($1.99/Month) for all residential customers. RPU is considering a policy that will result in all customers being enrolled in and covered by Service Assured, unless they opt out of the program. • $1,467,446 million in budget stability funding • No parking ramp or transit rate increases in 2022. Parking is in the process of updating our rate study and the transit team is currently updating the Transit Development Plan featuring a review of a fare free alternative. • $3.5 million increase in total City (non RPU) operating expenses from 2021. It should be noted that this is still a decrease of $4.7 million from the 2020 adopted operating budget and a decrease of $94.5 million in total expenses, inclusive of CIP, from 2020 adopted budget. • $1.9 million decrease in total RPU operating expenses from 2021. This is an increase of 4.9 million from the 2020 adopted operating budget and an increase of $8.1 million in total expenses, inclusive of CIP, from 2020 adopted budget. The Mayor and City Council’s Foundational Principles, Strategic Priorities, and longstanding tradition of being fiscally responsible provided the framework for developing the recommended budget. The longer term approach to budget stability also reflects our understanding that, while our community is recovering, many are still grappling with the ongoing impacts of the pandemic. We are committed to keeping the property tax levy focused on stability and long term service sustainability to serve our residents, businesses and visitors. While this budget does not include the magnitude of reduction required in 2020, it is difficult to present as it continues to reflect the ongoing impacts of the pandemic, and Federal recovery funding that is finite. The budget focuses on fiscal sustainability over the long term, rather than enhancements, and it directs resources to that stability through an appropriate levy adjustment, and use of budget stability funding on a one time basis. I want to recognize the efforts of Dale Martinson, Aaron Parrish, Rachel Houdek, Noloan Schild, the Leadership Team, and the Finance/Information Technology team for their involvement in the process. Also, continued appreciation to Mark Kotschevar and Peter Hogan from Rochester Public Utilities (RPU) for their ongoing work to combine RPU with the other City budgets, so the Mayor, City Council and Community are able to view one document containing all City budgets. 2021 Approved Reductions 2021 Reductions Reinstated in 2022 2021 Reductions Reinstated in 2023 Remaining 2021 Reduction Amount Revenues: General Fund revenue reductions 682,923 (556,623) (70,795) 55,505 Hotel/Motel tax reduction in revenue 1,695,000 (366,480) (407,121) 921,399 2,377,923 (923,103) (477,916) 976,904 Expenditures: General Fund expense reductions (495,887) 42,437 16,500 (436,950) Outside agency (84,540) - - (84,540) 11 frozen positions (5 reinstated in 2022 & 4 reinstated in 2023) (1,124,284) 486,248 409,942 (228,094) Overtime and benefits for General Fund (543,268) - - (543,268) General Fund reductions across departments (441,850) 131,749 98,714 (211,387) Contributions - Experience Rochester & Sports Commission (300,000) - 300,000 - Close the gap, fund from General Fund (721,812) - - (721,812) Library reductions (31,158) - - (31,158) Park & Recreation reductions (187,033) 43,194 143,839 - Airport reduction (9,601) 9,601 - - In Lieu reductions (45,186) 45,186 - - Capital Improvement Plan reductions (3,489,007) 3,489,007 - - (7,473,626) 4,247,422 968,995 (2,257,209) Grand total (5,095,703) 3,324,319 491,079 (1,280,305) 2021 Reductions Reinstated in 2022-23 Recommended Budget (excluding RPU)
2022 BUDGET MESSAGE 3 Economic Outlook The State’s financial outlook seems promising although there are still some tail effects of the economic adjustment that we need to plan for in 2022 and 2023. As an example, there may be a lagging inflation impact or cost corrections that impact personnel costs to stay competitive, durable goods may adjust again, and travel and consumer spending patterns may change. According to numerous reliable organizations, COVID-19 will have long-lasting financial impacts, but those impacts are inconsistently spread across demographic groups and industry classes. The July Revenue and Economic Update published by the State of Minnesota notes that the near-term U.S. economic outlook has improved. “The main factors driving the strong near-term economic recovery are (1) continued fiscal and monetary support, (2) the rising share of the U.S. population that is fully vaccinated, and (3) reopenings of state economies.” A key factor in assuring the economic vibrancy of Rochester is that the City is able to provide appropriate services, continue to invest in capital improvements, maintain infrastructure, and provide a robust resident and visitor experience to catalyze additional economic growth. Furthermore, the State of Minnesota may experience a multi-billion dollar deficit during the current biennium, which could result in intergovernmental aid reductions to local government. The recommended budget does not account for any speculative reductions, though realizing the State has its own financial challenges does cause concern. As impactful as the pandemic has been to date, there are many unanswered questions that could affect the City’s ability to deliver services or reshape how we support the community in the coming years. • Can our near term capital and strategic operating investments boost recovery? • There is a more positive outlook for transit and the airport and long term questions about parking operations. Will remote work and consumer safety perceptions have long-term financial consequences for our public transit, airport, and parking operations? • Will property valuations be impacted in future years compounding the financial effects on City revenues? 2022 anticipates 1.6% in new construction value, and a 2.9% increase in appreciated property value. • How will we wisely invest ARPA beyond revenue mitigation and achieve stability and enhanced levels of service at reasonable cost? How can ARPA be used to mitigate future financial obligations of the City? • Will the City need to re-prioritize its current services so it has the resources to meet basic community needs such as childcare, housing assistance, and food supply in the longer term? As we move forward with the 2022-2023 budget, we recognize the necessity to continue to closely monitor our many revenue assumptions and determine if adjustments may be necessary. This is especially true for hotel/motel, Rochester International Airport (RST), public transit, parking, parks & recreation, planning/ building permits, and intergovernmental revenues. We are very appreciative of the ARPA/Budget Stabilization funding totaling $17.4 million that we anticipate receiving and investing strategically to influence the six year budget forecast through revenue impact mitigation, support for people, reopening and resiliency and supporting innovation.. We are also buoyed by a one-year hold harmless for Local Government Aid (LGA), but prepared for that reduction to impact capacity in 2023.
2022 BUDGET MESSAGE 4 Revenue Summary The first step in the budget development process is forecasting the availability of non-property tax revenues to fund City services and projects. The revenue-first approach was guided by initial discussion with City Council that identified a strategy to “buy down” the cost of recovery to our budget with some ARPA dollars, while still returning stability and structural balance to our ongoing revenue needed to cover current service levels. This strategy was critical in developing the 2022-23 recommended budget, in order to apply an appropriate but reasonable tax levy to the revenue equation so that service levels are able to be delivered in line with community expectations. This is addressed in a twoyear scenario with the recovery of positions, support service, and contractual obligations not achieved until the proposed 2023 budget year. In total, the recommended budget includes $494 million in revenue of which $86.8 million is funded with property taxes. This amount is still less than what would have been predicted in a normal trend over 2019. This budget also benefited from a strong first half 2021 experience regarding new development and other building permit activity, increasing the revenue anticipated for this non-levy source by $300,000 in 2022 and indicating a positive outlook for increase in the tax value for new construction in 2023 and beyond. General Fund The City’s property tax accounts for approximately one-third of a Rochester taxpayer’s total bill (the others being Olmsted County, Rochester Public Schools, and State of Minnesota). Although the recommended budget recommends an increase in the Levy of 6.5% it should be noted that no levy adjustment was taken in 2021. That decision resulted in a permanent reduction in the overall tax levy and amount of tax paid by property owners because property values increased by approximately 7.3%, with 2.4% of that being absorbed by new construction in 2021. In 2022, an additional increase in value of 4.5% represented by existing value appreciation (2.9%) and new construction (1.6%). This means that on average, the proposed adjustment in levy is about 2.5% more than the value of new construction from 2021 and 2022. When new construction value is added, it absorbs its proportionate share of any increase in the levy amount, and reduces the amount of levy absorbed by all existing property. As shown in the local tax rate formula, the City’s tax rate decreased in 2021 and is anticipated to adjust to where it would have typically been one year ago – meaning there is still a lost year of value in the anticipated resource trend, while there is a larger base to spread the same tax levy amount over; continuing the City’s commitment to maintain core service levels, assure fiscal sustainability long term, and do so while mitigating the impact to tax payers. As a comparison, applying the same tax rate as 2020 would have generated an additional $5.8 million with $1.9 million of that absorbed by new construction. In 2022, a similar dollar amount is raised by the proposed levy with approximately 1/3 absorbed by new construction. 20.21% 17.56% 47.70% 12.09% 1.26% 0.97% 0.34% -0.13% Miscellaneous Revenue 20.21% Taxes Ad Valorem 17.56% Charges for Service 47.70% Intergovernmental Revenue 12.09% Other Taxes 1.26% Licenses and Permits 0.97% Special Assessments 0.34% Prior Year Revenues/Fund Balance -0.13% 2022 Total Operating Revenue, inclusive of RPU 2022 Total Operating Revenue Inclusive of RPU Local Tax Rate = Property Tax Revenue Needed (Levy) Total Tax Capacity (For All Properties)
2022 BUDGET MESSAGE 5 Even though property taxes only account for 17.56 percent of all revenues, it is the most visible and often discussed revenue source, as it supports police, fire, community development, library, parks, public works, and many administrative functions. The General Fund disproportionately relies on property tax revenue to fund these services, as demonstrated in the Governmental Funds chart. This reality added to the complexity of developing the recommended budget, as many revenues declined due to COVID-19 and have not yet returned, while cost of service has increased. During the same time, Local Government Aid (LGA) was reduced by the State of Minnesota prior to the pandemic, and although there was a hold harmless for an additional $1.2 million reduction that was anticipated in 2022, this budget anticipates that the city will lose this funding capacity in 2023. More specifically, the City’s General Fund non-property tax revenues are estimated to continue at a reduced rate from 2020 into 2022 and not fully recovering until after 2023. Notable revenue adjustments include: • $1.3 million continued decrease in hotel/ motel tax • $1.2 million anticipated decrease in LGA in 2023 • $385 thousand continued decrease in licenses and permits Prior to COVID-19, the City Council indicated a willingness to consider new revenue opportunities to cover a greater portion of service delivery expenses rather than continuing with its historic level of tax subsidy. However, due to the community impacts of the pandemic, new revenue source decisions have been delayed. An overview was provided mid-2021 and although no adjustments are anticipated in the 2022 or 2023 budget, these sources of revenue are being finalized for recommendation and could help to mitigate future levy adjustments, provide more certainty for property owners about assessments and construction cost, and result in a more cost effective way to maintain streets and sidewalks to higher standards. To assist in mitigating the loss of revenue in 2021, the recommended budget relied on $721,812 of General Fund reserves, but are built back into the proposed 2022 levy, as one time dollars cannot sustain ongoing expenses. It is also recommended the Payment In Lieu of Taxes (PILOT) paid to the General Fund from enterprise operations be maintained at 2021 levels and to work through a simplified PILOT program to be prioritized for an adjusted final 2023 budget.
2022 BUDGET MESSAGE 6 CITY OF FINANCIAL DISTINCTION The City of Rochester has a AAA Rating Rochester has received a Certificate of Achievement for Excellence in Financial Reporting for almost 50 years, the longest in the state of Minnesota. All Funds To fund all recommended expenditures, Table 1 provides the detail of the proposed 2022 Major City Revenues. For comparison, the 2021 Adopted Budget revenues are also provided. Noticeable is the fact that the majority of revenues are still flat or decreased from 2020, with minor increases from the 2021 adopted budget in order to assure the City is able to fund the services our community has come to expect. Expenditure Summary As mentioned, the total 2022 recommended (preliminary for RPU) budget is $494 million which includes all operating and CIP expenditures. The recommended budget is compared to the City Council’s 2021 adopted budget to show where changes have occurred in the operating, CIP, and debt service portions of the budget. As you can see, the 2022 recommended budget does not fully restore to the 2020 service levels, which totaled $587 million. Although capital planning does recover significantly – which will assure that costs aren’t pushed to and multiplied in the future. Capital projects also provide value across the construction economy of Rochester – putting people to work, purchasing materials, and improving infrastructure. 2020 Adopted 2021 Adopted 2022 Recommended 2021-2022 2021-2022 Budget Budget Budget Increase/(Decrease) Percent of Change Tax Levy & Tax Abatements 79,524,771 81,524,771 86,823,881 5,299,110 6.50% Local Government Aid 7,509,361 6,372,634 6,372,634 0 0.00% Hotel/Motel Tax 6,275,000 4,580,000 4,946,480 366,480 8.00% Cable TV Franchise Fee 1,440,000 1,350,000 1,300,000 (50,000) -3.70% Inspection Permits 3,795,000 3,477,633 3,410,426 (67,207) -1.93% In Lieu of Tax 12,884,858 12,884,858 12,726,858 (158,000) -1.23% Sewer Utility Charge 28,500,000 28,100,000 28,100,000 0 0.00% StormWater Utility Fee 8,572,000 8,572,000 8,734,260 162,260 1.89% Library Fund City Share-Levy 7,158,871 7,127,713 7,390,959 263,246 3.69% County Share 1,047,209 1,092,097 1,131,821 39,724 3.64% Municipal Recreation Fund Fee Revenues 4,294,872 4,317,072 4,138,604 (178,468) -4.13% Non-Fee Revenues 8,341,017 8,285,916 9,242,481 956,565 11.54% Parking Fund Parking Fines 370,000 370,000 466,676 96,676 26.13% Parking Ramps 7,418,756 4,618,275 4,618,275 0 0.00% Street Meters 1,075,000 1,175,000 1,325,000 150,000 12.77% Parking Lots 574,000 401,800 413,565 11,765 2.93% RPU Charges for Services 182,222,000 163,275,000 181,265,000 17,990,000 11.02% Private Funds 6,376,000 10,023,000 5,523,000 (4,500,000) -44.90% 2022 MAJOR REVENUES VERSUS 2020 & 2021 INCLUSIVE OF RPU Table 1
2022 BUDGET MESSAGE 7 The 2022 recommended budget is an increase of $22 million from the 2021 adopted budget with focus on recovering levels of service and returning to a proper life-cycle focused CIP. For the General Fund, $1.5 million of the expenses cut in the 2021 adopted budget have not been reinstated. This was achieved by returning only part of the significant decreases in the departments’ proposed budgets from 2021. I want to once again thank the Leadership Team for their unwavering commitment to support our community by working through a twoyear phased approach to return to pre-pandemic service levels. Most notably from the tax-supported funds: • Five positions reinstated in 2022: Assistant City Attorney II, IT Analyst- Junior, Librarian Assistant I, Community Service Officer, Planner. • Community Development Director Position was reallocated and funded in 2022. • Four positions frozen in 2021, are reinstated in 2023: Engineering Technician (2 - repurposed as 1 Design Engineer), Librarian I, and Library Associate II. • One position frozen in 2022, Principal Planner, is reinstated in 2023. • Two positions remain frozen from 2021, they are Communication and Engagement Coordinator and an Inspector. The Coordinator will be considered after review of construction and planning contracts that include engagement, and the Inspector is dependent on return of building permit revenue. • Equipment Replacements are fully reinstated. • Overtime will continue to be reduced by $450,000 and monitored/managed accordingly. • Temporary Salaries in the General Fund, were cut by 25% in 2021. 18.75% of the 25% was reinstated in 2022. The remaining 6.25% has possible funding in 2023. • Travel and Training in the General Fund, was cut by 50% in 2021. 25% of the 50% was reinstated in 2022. The remaining 25% has possible funding in 2023. Police is 100% reinstated in 2023. • Outside Agency funding is still reduced by 10% or $84,540. • Contributions to Experience Rochester and Rochester Sports are still reduced by $300,000 in 2022. • American Rescue Plan Act (ARPA) funds are being thoughtfully invested to ease the impacts of revenue loss and provide for emerging one time needs.
2022 BUDGET MESSAGE 8 Where Does the Money Go? The recommended budget includes expenditures in six major categories for all funds. Historically, employee services account for approximately 30 percent of total expenses. The actual percent generally depends on the CIP budget as this is the largest annual expenditure and fluctuates from year-to-year. Strategic Investment: There are a number of strategic investments that are proposed in the budget which will help to provide long term stability and service optimization: • 311 Customer Service (start up and initial funding through ARPA) • Facility Reinvestment Fund • Agency Counter • Sustainable Strategies DC grant development and federal funding advocacy • Enhanced Diversity Equity and Inclusion program support • Enhanced Stormwater Management funding In June of 2021 the City Council adopted a framework for ARPA that included allocating all of the funds ($17.4M) to revenue loss per the ARPA qualified uses identified by the Federal Act. At that time, the Council approved $6,162,537 in programmatic investments in phase one and $7,423,000 for inclusion in the budget stability fund. At this time, the Long Range Financial Management Plan only relies $6,262,224 of budget stability funding with $1,467,446 specifically programmed in 2022. This leaves $10,010,776 for future allocation.
2022 BUDGET MESSAGE 9 Teammates The City’s full-time and part-time teammates are the most important resource for the delivery of high quality services. Of the City’s annual investment in its professional team, approximately 68 percent is related to salaries and the remaining 32 percent is attributed to benefits (health and dental insurance, PERA, etc.). The 2022 cost of employee services in all funds will increase by $5.8 million over 2021 with the majority of the increase in base compensation per the existing collective bargaining agreements. Of the $5.8 million, $2.7 million is for General Fund teammates with the remaining in special revenue and enterprise funds. In the 2022 recommended budget there is $849,165 in frozen positions • The City currently negotiates with 19 different bargaining groups, with varying degrees of compensation structures and features covering approximately 950 full-time teammates. As a result, base pay is the primary component of the City’s overall compensation philosophy. Costs in the recommended budget are projected and will be finalized based on successful negotiation of eleven open labor contracts. Seven positions remain frozen in 2022, an additional Principal Planner position was added in 2022. The 2023 projected cost of employee services in all funds will increase by another $5.2 million, at which point, all but 2 frozen positions are anticipated to be restored, bringing service levels, generally, to 2020 pre-COVID reduction levels, and providing an opportunity to strategically look at enhancements and optimization of service for ongoing community needs. The costs are absorbed similarly to 2022, with the largest adjustment in base pay to meet contractual obligations, and the remainder the result of restoring positions frozen in 2020. The City is self-insured for health insurance. In 2022, the overall cost to the City, for health and dental premiums is projected to be increased by 5.9 percent. This is due to anticipation that bargaining units will pay an additional 1.25 percent of health insurance costs starting with our current labor agreements. Thank you again to all teammates for their willingness to further share in insurance costs. • All frozen remaining positions are proposed to be filled or adjusted in 2023, except the Communication and Engagement Specialist and Inspector Eight of the City’s nineteen agreements go through 2022. It is understood per the City Council’s recent discussions there is an expectation that future agreements continue to focus on balancing the City’s long-term financial sustainability with wages and benefits. Contingency Annually, the City Council’s adopted budget includes a $1 million contingency in order to respond to unanticipated expenses throughout the year. For 2022, the recommended budget includes an additional $275,271 to assure that unanticipated community needs can be met as COVID continues to evolve and the economic impact on our most vulnerable continues without the likelihood of any additional Federal assistance. To advance the City Council’s foundational principles of financial sustainability and public safety, it is recommended the funds be appropriated as follows in the adopted budget. • AED program - $156,000 (alternatively, fund this one-time cost from 2021 contingency and allocate in 2022 budget) • Sports Commission - $25,000 to accelerate lead generation for future events that support hospitality spending and boost return of Lodging Tax • City Council Discretion - $94,271 – This funding could be allocated to increase Outside Agencies (community funding program) or other strategic investment.
2022 BUDGET MESSAGE 10 Capital Improvement Plan The final significant piece of the recommended budget is the 2022-2027 CIP which totals $628.0 million. The CIP is divided into 23 categories and potentially funded by 34 different sources. For 2022, the CIP totals $132.2 million of which $7.6 million (or 5.7%) is funded through the tax levy. It should be noted that the current six year CIP only includes four years of RPU CIP data which will be updated following presentation of the updated RPU budget and CIP to the Board in September. Notable 2022 projects include (these reflect 2022 project costs and not total costs for multi-year projects): Summary I want to thank the Mayor and City Council for their ongoing leadership during these difficult times. Achieving a responsible increase in the 2022 and 2023 property tax levy during a time of reduced revenue, uncertain LGA, and increasing community expectations, is a testament to the City’s commitment to positive community outcomes. Moving forward, there continues to be great uncertainty with the impacts of COVID-19, economic recovery, and new demands on service. We must remain prudent in containing expenses, while meeting our community’s diverse public service needs. Sincerely, Alison Zelms, City Administrator City of Rochester, MN $14.5 million $14.4 million $11.1 million $10.7 million $7.0 million Bus Rapid Transit District Energy System Marion Road Substation Reconstruct 65th Street (Phase 1) Discovery Walk
City of Rochester 2022-2023 Operating Budget City Council’s 2022-2023 Budget Priorities
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Organizational Vision Foundational Principles Strategic Priorities City Vision - Environmental Stewardship - Fiscal Responsibility & Sustainability - Public Safety - Social Equity - Compassion A vibrant, compassionate, innovative team. - Affordable Living - Quality City Services for Quality Living - Economic Vibrancy and Growth Management Rochester is a city that cares. Where all people are treated with dignity and respect. Where residents, employees, and visitors enjoy high quality lof life. Where business and industry thrive, and where the land and environment are renewed and sustained for the benefit of all. It is a welcome and diverse community. Renowned for it’s reputation as a center for growth and innovation. Characterized by its safe and friendly neighborhoods. Committed to health and wellness for its people. Connected both physically and socially. Dedicated to the sustainable and responsible use of public resources. In order to achieve these priorities, the Council has committed to a legislative and process structure that emphasizes Strategic Governance and Inclusive Decision-Making: • Service delivery models consider partnerships where City is not always the leader • Decision-making is informed by citywide communication and engagement strategy with Diversity/Equity/Inclusion (DEI) at the forefront • Teammates create work plans/annual commitments aligned with Foundational Principles and Strategic Priorities • Policy and operational actions reflect equitable community investment Strategic Priority: Affordable Living Strategic Priority: Economic Vibrancy and Growth Management Strategic Priority: Quality Services for Quality Living Areas of Focus • Housing variety and affordability • Transportation options and access • Equitable regulatory landscape and creative incentives • Access to opportunities and amenities Areas of Focus • Create clarity, alignment and unity with economic development partners in defining city leadership and community values • Establish competitive and sustainable approach to effectively allocate DMC resources, Legislative allocations, and city revenue • Develop implementation tools and strategies for Comprehensive Plan to ensure current decisions reflect future projections • Adopt design guidelines that better reflect Council and community values VISION, PRINCIPLES, AND PRIORITIES Action Plan Action Plans will be developed to identify goals, actions and performance indicators that help advance priorities. Areas of Focus • Cultural and Recreational opportunities that provide access and equity • The organization and Services reflect changing demographics and needs identified by community • Operations are sustainable, integrated, and easy to navigate • Service delivery is optimized, cost effective, and reflect our Foundational Principles
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