Rochester City Council Study Session – June 23, 2025

The Rochester City Council held a study session on June 23, 2025, at 3:30 p.m. to receive the 2024 year-end audit presentation, a preview of the recommended 2026-2027 budget, including the Capital Improvement Plan (CIP) and outside agency funding, and to review the upcoming study session schedule. No formal votes were taken; the session was informational and deliberative.

Discussion Items

2024 Year-End Audit Presentation

• Jason Boynton of Smith Schaefer presented the audit results. The city received an unmodified (clean) opinion on its financial statements for the 53rd consecutive year, and the city expects to receive the GFOA Certificate of Achievement again.
• General Fund: Revenues were $120 million (up $11 million from 2023), expenditures were $117 million, producing a $3.1 million surplus that added to unassigned fund balance. Property taxes accounted for $69 million, up $6 million due to a 9% levy increase.
• Council Member Palmer questioned the surplus and noted that if the levy had been lower, the surplus would have been smaller. He also asked about the appropriateness of payment-in-lieu-of-tax (PILOT) amounts from enterprise funds. Administrator Zelms replied that PILOT rates are being reviewed for alignment.
• Fund Balance Policy: The unassigned fund balance stood at 48% of 2024 expenditures and 43% of budgeted 2025 expenditures, both above the city's minimum of 42% (five months of expenditures). Council Member Miller noted that this metric helps optimize the levy.
• Other funds highlighted: Library fund ended with $3.6 million fund balance (37% of expenditures); Municipal Recreation had $3 million fund balance (21%); Airport had a $1.6 million surplus, partly due to $1 million in CARES Act funds; Transit had a $568,000 surplus with no property tax levy for nine years; Parking had a small deficit of $58,000.
• Enterprise Funds: Electric utility generated a $35.6 million surplus; RPU is building reserves for upcoming capital needs (estimated $1.2 billion). Water utility surplus was $3.6 million. Sewer utility had surplus of $15 million (revenues $35 million, expenses $20 million). Stormwater surplus was $2.4 million.
• Bonds and Liabilities: Outstanding bonds totaled approximately $96 million (excluding utilities). Net pension liability (PERA) was $55 million, with a funding level of about 90%.
• Council Member Wall praised the city's financial position; Boynton confirmed that Rochester's planning and reserve-building are strong compared to peers.

Recommended 2026-2027 Budget Preview

• Administrator Zelms presented an overview of the budget process. The recommended budget is still being finalized; a full budget book will be presented at the August study session.
• Total levy increase requests from departments were $4.2 million before prioritization and baseline adjustments.
• Budget Optimization Options (potential savings totaling about $334,000): These included reducing Sunday library hours, scaling back the Fourth of July festival (saving $20,000 by only doing fireworks), discontinuing short-term rental licensing/inspections, and reducing adaptive recreation leased space. Council members debated these options, with Council Member Fredericks noting that comparison libraries have fewer weekend hours. Council Member Miller asked about using Cascade Lake for fireworks to save costs, but staff noted parking and logistics challenges. Council Member Doring suggested deferring detailed discussion until the full budget is presented.
• Tax levy impacts were illustrated: The median home value in 2025 was $288,000, and a 6% levy increase would result in about $80 more per year for that home.

Capital Improvement Plan (2026-2031)

• Deputy Administrator Parrish presented the six-year CIP. The total plan includes 210 projects across 25 categories, totaling $560.4 million. For 2026 alone: 127 projects, $144.9 million.
• Major 2026 projects include: Airport runway upgrades ($56.4 million), wastewater treatment liquids/solids upgrade ($14 million), Bus Rapid Transit ($7 million), Center Street reconstruction with roundabout ($5.7 million), and 18th Avenue improvements ($14.4 million, pending federal funding).
• Funding Sources: $40.5 million federal, $15 million state DMC funds, $9.3 million tax levy (plus $2 million from parks referendum). Council Member Palmer asked about street reconstruction funding from the local sales tax; staff will provide details.
• Council Member Schubert asked how projects land on the CIP; staff replied that projects requiring state/federal cost-sharing are often programmed only when those funds are awarded. The Sixth Street Bridge and East Zumbro sewer improvements were cited as examples not yet in the CIP due to pending funding.
• Council Member Palmer inquired about specific CIP line items: stormwater flood control on 12th Street and 3rd Avenue (separate from Broadway/14th Street project), a $60,000 bicycle parking allocation, and sediment removal from Silver Lake/Cascade reservoirs. Staff clarified that the sediment fund is a contingency placeholder.

Outside Agency Funding

• Administrator Zelms presented recommended funding for six outside agencies for 2026-2027. The recommended 2026 total is approximately $572,800, a roughly 5% overall increase from 2025.
• Details by agency:
  • 125 Live: $116,902 in both 2026 and 2027 (contractual).
  • Community Building Fund: $20,000 per year (no increase recommended). Council Member Palmer suggested the name is confusing; staff explained it funds small grants ($500–$5,000) for community-building projects.
  • History Center: $60,000 in 2026, $68,000 in 2027 (to support busing for school field trips).
  • Art Center: $56,000 in 2026, $60,000 in 2027 (operational support for summer programming).
  • Civic Theater: $65,000 in 2026, $71,000 in 2027 (to help maintain 300+ nights of use and support for 25 nonprofits).
  • Our Neighbors: $115,000 in 2026, $120,000 in 2027 (restoring to approximate 2020 funding level after pandemic cutbacks).
  • Rochester Area Economic Development, Inc. (RDA): $57,500 in 2026, $60,000 in 2027 (staff expressed concern about a requested $125,000 increase for marketing/staffing; no recommendation to fully fund).
  • Southern Minnesota Initiative Foundation (SMIF): $15,000 in 2026, $20,000 in 2027 (Council Member Wall supported elimination, but Council Member Palmer noted SMIF's reading programs benefit Rochester; the recommendation keeps funding).
• Council Member Miller asked for a report on Community Building Fund impact. Council Member Doring clarified that the Civic Theater and Art Center increases are to sustain current service levels, not new programs. Council Member Palmer supported the Civic Theater increase. Council Member Wall emphasized the quality-of-life value of the Art Center and RDA's Thursday Downtown events.

Study Session Schedule

• Administrator Zelms reviewed the upcoming meeting schedule. The July study session will be on July 14 (regular topics), and August will have a longer study session on August 11 with four significant topics (potentially until 7 p.m.). The August 25 meeting will consider the Recommended 2026-2027 Budget.

Key Outcomes

• No formal votes were taken. The council received the audit and budget preview as informational.
• Staff will provide additional details on budget optimization options, CIP project funding, and outside agency performance reports as requested.
• The full recommended 2026-2027 budget (operating and capital) will be presented at the August 11 study session.
• Council expressed interest in future discussions on scaling community investments (e.g., Community Building Fund, Our Neighbors) as Rochester grows.