The Five-year Financial Direction reflects the City’s ongoing commitment to long-term financial planning. The financial direction provides projections for property tax supported services, including the City’s General Fund, pensions, capital and debt. The purpose of recommending a 2022-2026 financial direction is to provide guidance for decision making on available planned resources in the City’s General Fund.
The General Fund is the general operating fund of the City and is the primary funding source for public safety, street paving, snow plowing and other general government services. In 2022 General Fund revenue is $582.6 million including transfers.
Historical financial performance
The results of the General Fund’s annual operations at the end of the year reflect the fund’s “fund balance,” or the amount of available, spendable resources in the fund. The balance provides the City a reserve to cushion adverse economic shocks and to meet a portion of the City’s cash flow needs.
The City’s financial policy for the General Fund balance is to maintain a minimum of 17.0% of the following year’s expenditure budget. For 2020, this equates to a required ending fund balance of $81.5 million which is 17.0% of the 2021 General Fund budget of $479.5 million (excluding transfers and contingency). The ending fund balance of $168.6 million represents a reserve of 35.2% of the 2021 budget.
For more information on the General Fund performance in 2020 please see the 2020 Fourth Quarter Financial Report.
In addition to the City's General Fund levy, the above five year outlook reflects the City’s commitment to the Park Board to support inflation in current service level operating expenses as well as an increase in ongoing support for youth programming through a $1.3 million increase in 2022, followed by a $260,000 annual increase to the Park Board in 2023 through 2027 to fund services for a total of $2.6 million in additional ongoing support. .
2022 General Fund revenue budget
The 2022 Council Adopted budget includes a total of $582.6 million of revenues for services incorporated in the financial direction, including transfers from other funds and use of fund balance. This increase of 9% to budgeted revenues is supported by $47 million transfer from the American Rescue Plan Fund that the City established to account for federal relief spending as well as a 6.11% increase in the General Fund portion of the total levy.
2022 General Fund expenditure budget
The 2022 Council Adopted budget for City services included in the financial direction is $582.6 million, which includes $52.0 million in transfers to other funds.
Approximately 44% of the overall expenditure budget is related to salaries and 19% is related to benefits. In the General Fund, budgeted salary and wage expenditures increase by 8.3% in 2022. The General Fund provides funding in some shape or form for most City functions. A breakdown of the allocation of the $582.6 million in the 2022 General Fund budget is reflected in the chart below.
General fund expenditures by service
Five-Year Financial Direction
The Five-year Financial Direction includes property tax levy increases of 5.45% in 2022, 5.0% in 2023, 4.88% in 2024, 4.86% in 2025, and 4.84% in 2026 and 4.77% in 2027. These percentages reflect funding for statutorily-required costs, the 20 year program for additional investments in streets and parks, and a current service level cost escalator for departments and support services.
The financial direction from 2023 to 2027 contains the most updated assumptions about contract settlements and other commitments, as well as projected changes in revenue.
The City adopted a compensation philosophy in 2007, rather than a specific salary policy. It is anticipated that salary settlements will vary within and between bargaining units. Assumptions are updated annually as contracts are settled.
Capital and debt service
As part of the 2018 budget, the amount of property tax supported resources for capital improvements was increased due to the historic twenty year Street Infrastructure and Neighborhood Park Funding Plan which was approved in April of 2016. For 2019 and future years, the intent is to provide a higher level of property tax supported (net debt bond) funding along with other resources to improve the overall condition of City streets and neighborhood park infrastructure. The additional resources will improve all types of capital infrastructure with a distinct emphasis on improving street paving, protected bikeways and pedestrian improvements, lighting and traffic related safety improvements and major improvements to neighborhood parks. More detail about the total resources dedicated for the Street Infrastructure and Neighborhood Park Funding Plan can be found in the Capital Budget Narrative Overview in this document.
The Net Debt Bond (NDB) program is paid for with property tax collections. The five-year financial direction for the bond redemption levy increased in 2018 and beyond to support the new street infrastructure and neighborhood parks funding plan.
Funding for pension liabilities
The five-year financial direction includes obligations for three closed pension funds that have since been merged into the statewide retirement system, the Public Employees Retirement Association (PERA) of Minnesota. The former closed funds that were merged are the Minneapolis Police Relief Association (MPRA), the Minneapolis Firefighters’ Relief Association (MFRA), and the Minneapolis Employees Retirement Fund (MERF). The City has ongoing obligations funded from within departmental budgets to PERA to support current and former employees’ retirement plans. The City maintains minimal cash balances to respond to policy changes relating to these closed pensions.
Key considerations for future budgets
- Property taxes: Future projections plan on property tax increases to support future services. Reducing the growth in property taxes in the face of additional budget needs will require the City to continue monitoring other revenue sources and expenditures, as well as looking at creative ways in which to reallocated existing resources.
- Performance Information: As the City continues to gain experience with using results information for performance discussions, it will need to undertake benchmark development in using this information for financial decision making.
- Internal Service Costs: The City continues to see increasing costs to internal services, particularly in fleet - as vehicle replacement costs are rising; and, in information technology (IT) – as increasing demand for new systems create additional future obligations that must be recognized. The City will need to be mindful of containing these costs while continuing to provide current service levels.
- Aging Facilities: The City is responsible for facilities, including City Hall, Police Stations, and Fire Stations, that are not contemplated in its existing capital processes. As these facilities need major repairs and maintenance, there will be a need to recognize large out-year commitments to fund these projects.
Assumptions for 2023-2027
- Out-year projections will be adjusted over time as new information becomes available. In particular, the speed of the economic recovery and decline in spending out of the self-insurance fund will be key indicators.
- In order to provide a cushion for uncertainty related to seasonal and economic conditions a contingency fund equal to 1 percent of total General Fund spending is assumed in each year and a 97% collection rate is assumed for the property tax levy.
- Health insurance costs are assumed to increase by 5% annually and wages assume accross the board increases in commensurate with recent contract settlements.
- FTE levels are expected to remain relatively flat in 2023 through 2027 with the exeption of sworn police officers. After the unprecedented attrition in 2020 and 2021 the five year financial projection includes an increase from 756 in 2021, to 829 in 2023 and 888 in 2024.
- Non Property Tax Revenues in the General Fund are projected using actuals from recent years and input from subject matter experts at the City.
- Expenditures for the cost allocation model for internal City departments and the government service fee also include cost escalators.
- Local tax revenue is recorded as direct revenue into the Downtown Assets Fund, and a portion, generated primarily from entertainment taxes, is transferred to the General Fund. Sales tax revenues in the General Fund are used for capital projects, and economic development. Because of significantly reduced sales tax revenues, the transfer into the General Fund is not projected to reach 2019 levels until 2025.