Rochester City Council Study Session: Budget Factors and Rules Review - April 28, 2025

The Rochester City Council held its April 28, 2025 study session at the Government Center Council Chamber, beginning at 3:30 p.m. The meeting covered two primary agenda items: a comprehensive review of factors influencing the two-year city budget, followed by a review of the City Council Rules of Procedure and Code of Conduct. The meeting concluded with a closed executive session on labor negotiations pursuant to Minn. Stat. Section 13D.03. City Administrator Alison Selms and Deputy Administrator Aaron Parrish led the budget presentation, while City Attorney Michael Spindler-Davies covered the rules review.

Factors Influencing the Budget - Strategic Priorities Update

• Administrator Selms presented an update on the strategic plan refresh, noting that feedback from prior study sessions informed proposed changes to foundational principles and strategic priorities.
• Council members expressed general support for moving "quality services" and "inclusive decision making" to foundational principles, and for breaking strategic priorities into more focused categories: inclusive growth management, housing access, economic resilience, transformational capital projects, and responsible environmental stewardship.
• Councilmember Miller suggested using "integrate" instead of "encourage" for environmental stewardship language, and Mayor Norton expressed a desire for the stewardship priority to extend beyond city operations to the broader community.
• Councilmember Keene emphasized the importance of focusing on executing existing transformational capital projects (e.g., Bus Rapid Transit, Sixth Street Bridge) rather than being distracted by new initiatives.
• Administrator Selms noted the group is "heading in the right direction" and will schedule a follow-up discussion to flesh out the meaning of each strategic priority.

Budget Overview and Economic Indicators

• The total 2025 city budget, including Rochester Public Utilities, is just shy of $720 million, serving nearly 57 square miles.
• Property tax levy accounts for less than 16% of the total budget; the majority comes from charges for services (utilities, parks and recreation), intergovernmental revenue, and other sources.
• The general fund (public safety, public works, fire, police) is more reliant on the property tax levy — roughly $11 million for 2025.
• For a median-value home of $288,000, city property taxes are about $1,325 per year.
• Rochester's unemployment rate is just over 2%, considered full employment by some economists.
• Building permit valuations reached a record $700 million in 2024.
• Lodging tax collections have recovered from a pandemic-era low of approximately $6 million to just under $11 million.
• Sales tax collections came in at just under $16 million versus a projected $13 million.
• Property tax valuation grew by 1.77% (new construction) and existing properties grew 4.81% in value.
• A projected 2026 property tax levy increase of 10.68% was presented, down from the forecast of previous years due to staff optimization efforts. Councilmember Wall praised staff for reducing the projected increase by about 2%.
• Mayor Norton emphasized that the levy increase percentage does not translate directly to each property's tax bill, as it depends on valuations and shifts among property classes.
• Staff noted that $2.3 million of one-time federal ARPA funding had been used to buy down the levy in 2023, stepping down to $1.4 million later; Rochester received $18 million in ARPA funds compared to Duluth's $65 million and Minneapolis/St. Paul's ~$100 million, according to Mayor Norton.

Key Budget Challenges and Cost Drivers

• Labor costs are a major driver: the baseline budget carries a 4% cost-of-living adjustment for 2026 and 3% for 2027 across the city's 20 bargaining units.
• Health insurance costs are projected to rise 8% and dental 1.5%; the state's paid family medical leave program adds an employer contribution of 0.44%.
• The state's duty-related disability health insurance reimbursement is projected to drop from 100% to its historical 45% level in 2027.
• Local government aid of $5 million is at risk depending on state budget outcomes.
• The city has 55 active federal grants; major funded projects include the airport runway project (over $90 million) and Bus Rapid Transit ($85 million).
• The facility condition index identifies approximately $120 million in deferred maintenance across city buildings, including nearly $40 million for the Civic Center alone; the current facility renewal budget is about $1 million per year versus an estimated $110 million need over the next decade.
• The equipment revolving fund is under pressure due to rising replacement costs, and property insurance premiums are increasing substantially this year.

Budget Policy Considerations and Cost-Saving Options

• Administrator Selms outlined approximately $1.7 million in positive revenue adjustments (e.g., building permit fees) and $1.3 million in expenditure adjustments.
• A list of potential service-level changes was presented for future discussion, including reducing library Sunday hours, ending the day-long Fourth of July festivities (but keeping fireworks), adjusting tall grass/weed enforcement, and changes to disease tree complaint processes.
• Councilmember Doring expressed strong opposition to any reduction in library services, saying his constituents want more robust library services. Councilmember Fredericks supported retaining the fireworks.
• Outside agency funding for 2025 totals $838,000; requests exceed that by $180,000, and Administrator Selms recommended holding increases to approximately 5%.
• The issue of a gas utility franchise fee (newly authorized) was raised by Councilmember Miller as a potential revenue source for energy efficiency programs, though staff noted it likely would not be ready for adoption in this budget cycle.
• Councilmember Miller also requested analysis of the cost of services relative to property values per acre and integration of transportation planning goals with the comprehensive plan.

Council Rules of Procedure & Code of Conduct Review

• Administrator Selms and City Attorney Spindler-Davies reviewed the purpose of the rules, including meeting procedures, ethics requirements, and the prohibition on gifts of more than nominal value ($5 per state statute).
• Council President Schubring proposed creating a task force of two to three council members and staff to explore ways to lengthen the "glide path" for high-impact decisions, improve public engagement, and reconsider study session objectives. He also raised the idea of council committees as a first stop for key proposals.
• Councilmember Keene expressed caution about creating subcommittees, noting the open meeting law implications (confirmed by the City Attorney, who stated subcommittees are treated as separate public bodies), and suggested that the study session format may already serve this function.
• Councilmember Wall asked to revisit the process for selecting council board and commission liaisons, noting the November 2023 change had received little engagement.
• Councilmember Miller suggested adding study sessions on the occasional fifth Monday of the month and discussed moving public comment from two minutes to three minutes, which Councilmember Keene also supported.
• Mayor Norton raised two additional items: revisiting the rotating chair/vice-chair appointment process (the current system assigns by month/ward, which has created awkward situations when both the chair and the mayor are absent), and clarifying the mayor's role relative to the council, citing charter ambiguity.
• No formal votes were taken on these items; staff will synthesize the feedback and report back with viable options.

Study Session Schedule

• The next study session is scheduled for May 12, 2025, including the annual bus tour. A June 9, 2025 study session is also scheduled, though Councilmember Miller noted a potential duplicate topic (UDC downtown parking) and staff agreed to verify.

Key Outcomes

• No formal votes were taken on budget or rules items during this portion of the meeting; all decisions were deferred to future sessions.
• Staff will return with synthesized feedback on strategic priorities and schedule a follow-up discussion.
• Administrator Selms requested council feedback on budget policy questions before the end of May.
• The full council voted unanimously (7-0) to move into closed session pursuant to Minn. Stat. Section 13D.03, subd. 1(b) to discuss strategies for labor negotiations. The motion was made by Councilmember Wall, seconded by Councilmember Miller, and passed with all members voting aye.