Back in February, I wrote that falling commercial real estate prices are hitting local budgets. That is now biting in Minneapolis.
The Star Tribune reports:
Minneapolis is staring down a money hole, and residents will likely be asked to pay for it through their property taxes next year.
Downtown real estate is tanking, pandemic funds have dried up and unionized workers are demanding raises to keep up with inflation, creating the kind of fiscal challenge the city hasn’t faced in at least a decade.
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[Minneapolis Mayor Jacob] Frey now sees it as almost impossible to stick with his planned property tax levy increase of 6.1% or less. If the city can’t rein in spending, that increase — the total amount of money raised through property taxes — could bust double digits.
Spending
There are two sides to this problem. First, Minneapolis City Council is ramping up spending. The Star Tribune explains that:
The fundamental problem is how the city will raise enough money to meet the rising cost of its roughly 4,200 full-time employee positions — the largest spending component of the city’s $1.8 billion budget.
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But the cost of keeping those workers is rising.
Last month, the city reached an agreement with the union representing about 440 public works employees, and they achieved record wage increases. Unions representing firefighters and laborers also inked contracts featuring raises. The city is currently in closed-door talks with the Minneapolis Police Federation, where Frey and others have publicly supported raising wages and giving incentives for hiring and retention.
Next year, at least 12 union contracts covering some 1,125 workers, ranging from attorneys to building inspectors, will be up for renewal, with unionized workers expected to demand higher wages after a period of steep inflation.
Revenue
At the same time as spending is increasing, commercial property values are tanking and dragging down commercial property tax revenues. The Star Tribune reports that:
For the first time in at least a decade, the total value of Minneapolis property has fallen, the city assessor’s office announced in March.
The 3.1% drop citywide included a 1.2% decrease in residential property values, but the real drag is the central business district downtown, where the impact of the work-from-home shift has been manifest.
The value of downtown commercial real estate — think: high-rise office buildings — plummeted 13%.
That change means a rapid acceleration of a trend that is already under way: Residential properties will have to shoulder a bigger share of the property tax burden. Here’s a comparison: In 2020, residential properties — both single-family homes and multi-unit rentals — made up just over 66% of the total property tax base; now that figure has jumped to just over 71%.
The looming budget battles
The Star Tribune notes that:
The ambitions of the progressive majority on the City Council could run up against Frey’s relatively austere approach, so a potential budget battle looms in coming months.
It isn’t a battle that will only be fought in Minneapolis. Any city which has seen commercial property values hit like that will be faced with the same problem, in some degree.