Housing slump echoes at City Halls

As the city of Shakopee rocketed from only 12,000 people in 1990 to nearly three times that today, the last thing anyone ever considered was letting people go at City Hall.

But it happened this year. "For the first time in my 11 years here," said Mark McNeill, the city administrator, "we have laid a person off."

A sudden downdraft in the housing market has cut deeply into revenues of a city that once was the fastest growing in the metro area.

Across the Twin Cities area, the number of permits being issued for new home building is well under half what it was in 2003, when the region peaked at more than 17,000 units. And although Shakopee -- a high flier in those days -- is losing more income today than most, the drop is affecting the finances in many growing suburbs.

Across the country, the National League of Cities reported this fall, city spending is rising three times faster than revenues, partly because of the stressed housing market. That, the group warned, is apt to result in cuts in spending, increased taxes, or a combo platter.

In the Twin Cities area, the effect varies quite a lot. In Maple Grove, for instance, site of the metro's fourth-biggest decline in new housing units in the past few years, the damage has been cushioned by major additions to the retail tax base, including the Fountains phase of the Arbor Lakes shopping area.

"Housing certainly has slowed down," said the city's finance chief, Jim Knutson, "but our commercial side has continued to carry us."

Unless construction picks up, what will bite more for Inver Grove Heights, she added, is simply the tapering off in growth in the city's tax base -- growth that allows cities to take in more taxes without raising tax rates.

Feeling the pain

Shakopee is ground zero for fallout from the housing slump not only because it was once the region's fastest-growing city, but because it also relied on revenue from building permits to sweeten its finances and keep taxes down.

A few years ago, when the Builders Association of the Twin Cities was looking for a target to make an example of, it chose Shakopee for precisely that reason. It wrung concessions from the city by means of a lawsuit alleging that the city was improperly diverting permit revenue into the city's general coffers, which isn't allowed.

Past city officials have conceded that this was a deliberate strategy, and the suit resulted in changes, including steps to ensure a direct relationship between the cost of processing new developments and the fees charged.

The result for the city has been sobering, finance director Gregg Voxland reports: slipping from more than $3 million a year in income from building permits and the like as recently as 2005 to a projected $647,000 for 2008. Even that figure was looking optimistic, he told council members in an informal work session in August: "We should probably look at a number that's lower than that."

"Honestly," Council Member Steve Menden told his colleagues during that session, "we have to have a heart-to-heart discussion on reducing spending."

Schmitt, the mayor, cautions, moreover, that "this is not the critical year -- [2009] will be the critical year. We still have rising property values. But we won't have that next year. My stress to the other four gentlemen [on the City Council] is that that catch-up is going to occur."

Ideas about raising revenue

In the past couple of years, the share of the city's budget covered by property taxpayers has risen from half to 75 percent, mainly because property owners had to cover the gap as less money came in from new developments. And the city has wrestled with ways to raise more money, including charges for responding to some emergency calls -- an idea that hasn't been approved yet.

Shakopee's large commercial and industrial tax base has helped keep property taxes on homes moderate compared to other nearby cities. But taxes on homes have been rising faster than in neighboring cities, according to Citizens League reports.

Schmitt is concerned that the city isn't keeping up on maintaining the property it owns.

"The sky is not falling," he said, "but we have to do a better job of maintenance. When you don't fix something, eventually you have a crisis. The biggest thing there is our community center, where we have issues to be dealt with."

Administrator McNeill thinks, too, of "the large number of new parks we've opened in recent years, which all have to be mowed, maintained, painted. Even if we chose not to expand services here [at City Hall] or hire another police officer, we do need to take care of what we have."

Still, he said he is relieved not to be in charge of a suburb like those in the Nashville area that raked in so much money from new construction in recent years that they stopped collecting property taxes at all -- and are now in the midst of a full-fledged crisis.