7 things to know amid conversations of Rochester's planned 2025 budget

ROCHESTER — A variety of potential impacts that could affect tweaks to the second year of Rochester’s two-year city budget plan were discussed by the Rochester City Council on Monday.

The two-year budget plan includes the opportunity to make supplemental requests related to expenses that weren’t identified when the budget was initially adopted in 2024. Any final changes would be adopted at the end of 2024 for spending in 2025.

“The goal for this year and prior years is to maintain the level of service,” City Administrator Alison Zelms told the council, pointing to increased costs related to meeting established council and community priorities.

The current 2025 budget calls for $629.4 million in operating expenses with a planned 8.5% tax levy increase to produce $110.2 million in revenue. The projected revenue does not include a planned 0.5% levy increase to support construction of a new Silver Lake Park pool.

“We will be moving forward to adjust that to reflect what the City Council approved,” Zelms said of the $5 million pool and splash pad project.

Here are a few things to know about other things that could impact future revenue and spending:

1. Building permit values exceed projections. 

Values tied to building permits dropped by 6% in 2023 to land at $528.6 million, but the first months of 2024 saw city revenue related to the permits hit 40% of the year’s projected earnings.

“We are very encouraged with what we are seeing,” Deputy City Administrator Aaron Parrish said, pointing to a variety of work that’s planned and outpacing past permitting.

2. The city’s lodging tax revenue has rebounded to nearly per-pandemic levels.

Nearly $10.3 million in lodging taxes were collected in 2024, approximately $131,000 shy of the collection in 2019.

In 2020, the tax revenue dipped below $6 million for the lowest point in the pandemic.

The city has committed $4.2 million of the lodging tax to cover 2025 expenses related to operating the Mayo Civic Center, with the remaining tax revenue committed to covering other building costs, paying off debt for renovations and creating a reserve fund for future reinvestment into the facility,

3. Annual sales tax revenue is nearing $16 million. 

The city collected nearly $15.8 million in sales taxes in 2023, up from $15.4 million the previous year and a five-year low of $12.2 million in 2020.

Parrish said the updated revenue could reduce the number of years needed to collect the $205 million recently approved in a voter-supported sales-tax extension, which will cover four specific city projects, including the creation of a planned $65 million sports and recreation complex.

4. Property values grew by 4.3% this year. 

The estimated market value of properties in Rochester is growing, according to Olmsted County assessments.

The latest assessments, for property taxes that will be collected in 2025, show that a 2.4% overall value increase is the result of adjustments due to increased property values, while a 1.9% increase is connected to new construction in 2023.

5. Federal funds used to offset property tax increases are being depleted. 

Rochester has been using federal funds from the American Rescue Plan Act to reduce property tax increases since 2022, the year after the City Council opted to not increase the tax levy in response to the COVID-19 pandemic.

This year, $1.4 million in federal funds are being used to offset potential property tax revenue, but the amount is cut in half for 2025, and the remaining $285,500 is slated to be used in 2026.

6. Overall property tax collection is expected to increase and state support remains fairly flat. 

Six-year tax levy projections anticipate a need for increases each year.

The levy is the total amount collected through all tax categories in the city, and an increase to the levy does not always mean an increase for all individual property owners.

While the tax need is increasing, the city is anticipating minimal, if any, increases to local government aid from the state of Minnesota, which currently stands at approximately $5 million a year, compared to $81 million received by both Minneapolis and St. Paul and $35 million received by Duluth.

7. Budget discussions are just beginning. 

Following Monday’s review by the City Council, staff is expected to continue work.

A recommended supplemental budget will be proposed in August, before the council is required to set a preliminary 2025 tax levy in September.

A final 2025 budget is expected to be reviewed on Dec. 2, 2024.