On the Impact of Special Assessments from Council Member DunlapON THE IMPACT OF SPECIAL ASSESSMENTS
Prepared By: Ryan Dunlap, Otsego City Council
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Introduction
ThepurposeofthisanalysisistoexaminetheuseofSpecialAssessmentsforroadrecon-
struction within the City of Otsego and provide recommendations to the Council on how
to reduce the reliance on this method of funding roadwork. Recent court cases and the
current economic climate have prompted a review of existing policy, and in preparing
this document, I aim to offer clarity and actionable suggestions for consideration.
Disclaimer:The views expressed in this document are mine and do not necessarily represent
the views of the City of Otsego. I am not an attorney, and the discussion presented here that
may touch on legal issues are from a layman perspective and do not constitute legal advice.
Background
The current ordinance for Special Assessments was established in 20131 in order to align
city code to Minnesota State Statutes and find uniformity with The League of Minnesota
Cities model language. This also established the city policy on the purpose, methods,
and standards for Special Assessments. At the time that the ordinance and policy were
adopted, road reconstruction and overlays for residential streets would receive a Special
Assessment of 50% of the cost of the project. Gravel roads and commercial properties
were to be assessed 100% of the project cost.
In 2021, the Council amended2 the city policy for Special Assessments. The changes in-
cluded removing overlay work from Special Assessments, and then changing curb work
and road reconstruction to receive Special Assessments up to 20% of the project cost, to
a maximum amount set in the fee schedule. The purpose for this change was to address
concerns that increasing construction costs would not survive a legal challenge on the
basis of The Special Benefit Test. For 2023 the fee schedule3 has the Special Assessment
for a single family residential lot as an amount not to exceed $1,092. This amount is set
byusing$1,000in2021dollars-inotherwords, thefeeadjuststoinflationeveryyear.
The Special Benefit Test
The League of Minnesota Cities summarizes4 the Special Benefit Test as having the fol-
lowing components:
1.The land receives a special benefit from the improvement.
2.The assessment does not exceed the special benefit measured by the increase in
market value due to the improvement.
3.The assessment is uniform as applied to the same class of property, in the assessed
area.
1 Ordinance 2013-04 and Resolution 2013-06
2 Ordinance 2021-08 and Resolution 2021-23
3 City Code, City of Otsego: Title 3, Ch 1, Sec 2
4 League of Minnesota Cities: Special Assessment Toolkit
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Minnesota Constitution
Article X, Section 1 of the Minnesota Constitution highlights the authority for Special
Assessments:
The legislature may authorize municipal corporations to levy and collect as-
sessments for local improvements upon property benefited thereby without
regard to cash valuation. The legislature by law may define or limit the prop-
erty exempt under this section other than churches, houses of worship, and
propertysolelyusedforeducationalpurposesbyacademies, colleges, univer-
sities and seminaries of learning.
Courts have clarified that property taxes may not be applied to certain exempt proper-
ties; however, Special Assessments are considered a fee and are applied under the polic-
ing powers of a municipality. In the situation where a Special Assessment is invalid be-
causeitdoesnotmeettheSpecialBenefitTest,thenitwouldbetaxedunderthefirstpart
of this section.
The phrase “without regard to cash valuation” means that Special Assessments are not
based on property value (because that would be a tax). Rather, the fee of Special Assess-
ments are based on the increased value of the improvement.
Minnesota State Statutes
The power to improve city streets are granted under MN § 429. Specifically, MN §
429.021 (Sub 1.1) grants the authority:
To acquire, open, and widen any street, and to improve the same by con-
structing, reconstructing, and maintaining sidewalks, pavement, gutters,
curbs, and vehicle parking strips of any material, or by grading, graveling,
oiling, or otherwise improving the same, including the beautification thereof
and including storm sewers or other street drainage and connections from
sewer, water, or similar mains to curb lines.
Additionally,MN§429.031(Sub1.b)outlinestheproceduresforestablishingafeasibility
report:
Before the adoption of a resolution ordering the improvement, the council
shall secure from the city engineer or some other competent person of its se-
lection a report advising it in a preliminary way as to whether the proposed
improvement is necessary, cost-effective, and feasible and as to whether it
should best be made as proposed or in connection with some other improve-
ment. The report must also include the estimated cost of the improvement as
recommended. A reasonable estimate of the total amount to be assessed, and
a description of the methodology used to calculate individual assessments for
affected parcels, must be available at the hearing. No error or omission in the
report invalidates the proceeding unless it materially prejudices the interests
of an owner.
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InthesituationwhereSpecialAssessmentsarenotbeingmade,thefeasibilityreportand
public hearing would be unnecessary.
Constitution of the United States
The Constitution of the United States (Amend. V) states, in part:
…nor shall private property be taken for public use, without just compensa-
tion.
This is important because the just compensation in the case of Special Assessments is the
increase in property value as a result of the improvement. If there is no increase in value,
thenthetakingsisunconstitutional. Furthermore,theuseofthestreetisnotconsidered
just compensation because everyone has the use of the street: it is a public road.
Problems with special assessments for
roadwork
The current economic climate is one in which everyone is feeling the effects of inflation.
Real wages have declined nationally for the 32nd straight month5 . The situation that
residents of Wright County are faced with is one in which there is the highest job vacan-
ciesonrecord6 . IncreasingthetaxburdenonresidentsbychargingSpecialAssessments
adds an additional, unexpected cost.
For example, the distribution of property taxes for those properties included in the 2023
StreetRenewalProjectaredisplayedinFigure 1. Thisshowsthatmostresidentsincluded
in the project are currently paying less than the $1,092 that would be charged as part of
the Special Assessment for the road project.
The Special Assessment applied to these properties would be a significant portion of the
annualtaxpaymentfrom2023forthoseresidents,asshowninFigure 2. Sincemostresi-
dentsincludedintheprojectarenotcurrentlypayingpropertytaxesthatarehigherthan
the Special Assessment, the impact to them would be more than double what they are
currently paying. This comparison is useful because it helps to highlight how this un-
expected bill would impact these families, relative to what they typically pay in taxes.
Even those property owners that choose to pay installments and take on additional pay-
ments would see an increase in their annual tax payments around 25% with some res-
idents seeing an increase even higher than that. The distribution for all impacted resi-
dents should they choose to pay in installments is shown in Figure 3.
The Special Assessment imposed by roadwork in Otsego is a charge levied on property
owners to finance road reconstruction projects in a specific area. This means that only
residents who own property during a road reconstruction period will be impacted by the
5 Bureau of Labor Statistics
6 MN Department of Employment and Economic Development, regional data
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Figure 1:City property tax distribution for properties included in the project
Figure 2:Special Assessment as a percent of property taxes for properties in the project
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Figure 3:Annual installment as a percent of property taxes for properties in the project
assessment. Consequently, residents who purchase a property in Otsego after the com-
pletionoftheroadreconstructionprojectwillnotbesubjecttotheSpecialAssessment.
This creates a situation where the amount each resident pays towards road reconstruc-
tion may differ based on the timing of their home purchase. For instance, if a resident
buys a home during a road reconstruction project, they will be required to pay a portion
of the cost of the project as a Special Assessment. In contrast, if another resident pur-
chases a property after the road reconstruction project is completed, they will not have
to pay any Special Assessment towards the project.
This variation in the amount paid towards road reconstruction can lead to disparities
among residents in the same area, as some may end up paying more than others.
Imposing Special Assessments entails additional administrative costs that make it
a more expensive option than using the general tax levy. Although it is challenging
to accurately estimate the total cost of conducting meetings, sending notices, and
resolving legal disputes, it is not unreasonable to expect a cost of around $5,000 to
$8,000 per project.
The cost of administering Special Assessments includes expenses related to notifying
property owners of the assessment, conducting public meetings to discuss the assess-
ment, and resolving any legal disputes that may arise. These costs are in addition to the
costoftheroadworkprojectitself,makingSpecialAssessmentsamoreexpensiveoption
for taxpayers than using the general tax levy.
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Alternatives to special assessments
According to the Minnesota House of Representatives Research Service7 , there are no
alternative funding options for road reconstruction projects apart from the general tax
levy. Their research cautions:
In some cases, even if a local government wanted to derive the full cost of the
assessment solely from the benefited property, it would not be able to, since
the total cost of these improvements often exceeds the amount by which the
improvements increase the market value of the affected properties.
This makes sense, and it is a concern for the current city policy that charges Special As-
sessments at a rate of 100% of the cost of roadwork projects for multi-family, commer-
cial, industrial, and institutional properties.
Case studies
In recent years, cities have had to move away from charging Special Assessments for
roadwork. Some of these changes have been the result of legal findings, while others
have taken the initiative to perform their own analysis and determine better ways to
fundroadwork. ThecitiesofDuluth, Rochester, Edina, andNorthfield8 nolongercharge
Special Assessments for roadwork. Edina in particular did a large scale study in order
to phase out Special Assessments over a period of several years. The city of Faribault9
eliminated Special Assessments last year. Additionally, St. Paul10 has had to eliminate
roadwork from their Special Assessments due to a court ruling earlier this year.
The judge in that Ramsey County District Court case ruled that mill and overlay work
did not qualify as a special benefit because it is maintenance work that benefits the city
as a whole. As a result, St. Paul will have to utilize the general tax levy for that work.
This raises the following question: if mill and overlay is not considered a special benefit,
thenwould reclamationandreplacement alsofailthefirstpartoftheSpecialBenefitTest?
These roads are public roads, not private roads. As such, there is no special benefit.
IntheCityofOtsego,residentsinWaleschEstatesandO’DayAcreshadtheirroadredone
last year as part of a Street Renewal Project. Those residents were charged the Special
Assessment of $1,092 as per the fee schedule. One resident had objected to the charge
noting that they were an elderly homeowner on a fixed income and the additional cost
was too much for them. In reviewing the most recent property valuation for that prop-
erty along with comparables in the area, it would be difficult to make the case that the
property value increased due to the road being replaced in front of the home of that res-
ident. In fact, the increase in the value of their property is consistent with other homes
in the area that did not receive any roadwork as part of the Street Renewal Project.
7 House Research Services: Special Assessments
8 Star Tribune: Minnesota street projects often are funded by hefty assessments. But is that fair or legal?
9 Faribault Daily News: Cities get creative with special assessment options to lessen the burden
10 Pioneer Press: Judge: St. Paul’s street sweeping, street lighting, mill-and-overlay charges should be
property taxes, not fees
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Policy recommendations
It is advisable to discontinue the use of Special Assessments for roadwork considering
the legal hazards and financial consequences faced by residents. Furthermore, policies
affecting the council’s decision-making process should be made public for examination
and evaluation. The League of Minnesota Cities suggests retaining a policy for Special
Assessments due to the frequent turnover in City Councils. Nevertheless, maintaining
anunpublishedandunreviewedpolicydocumentlackstransparency,whichiscrucialfor
residents and taxpayers affected by the policy.
Conclusion
The funding for road repair, maintenance, and reconstruction ought to come from the
generaltaxlevysinceroadsareconsideredapublicgoodthatbenefitsbothresidentsand
visitors. Property taxes serve the purpose of supporting these public goods. Addition-
ally, it is unlikely that roadwork would substantially increase property values, making
it unconstitutional for the city to impose Special Assessments for such work. Further-
more, the ambiguity surrounding the Special Benefit Test raises legal uncertainties for
Otsego’s residents and puts them at risk of potential legal liabilities should the city be
challenged for its current road project.
Before a court decision compels the City to act, the Council can take the opportunity to
revise the policy and limit the use of Special Assessments to cases where there is a clear
special benefit. It is advisable for the Council to make this change sooner rather than
later.
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