WILLMAR — When retailers and businesses began collecting the voter-approved 0.5 percent local option sales tax in October 2019, the city of Willmar estimated it would collect approximately $250,000 per month. The funds are to pay for six regional projects — Willmar stormwater improvements, a recreation and event center, new recreation fields, a community center project and updates to both Robbins Island and the Swansson Field Recreation Complex.
Reality has fallen short of those estimates. In the final three months of 2019, the city collected $531,694 in sales tax revenue, only 71 percent of the estimated $750,000 the city thought it would gather.
"Collections are lagging behind what we thought they would be," said Willmar Finance Director Steve Okins at the April 9 meeting of the Willmar City Council's Finance Committee.
The city is speaking with the Minnesota Department of Revenue and Kandiyohi County to see if the tax numbers are correct. Okins said that when the county first started collecting its sales tax for road projects in 2018, there was a lag in collections, due to businesses still needing to get the increased sales tax in their systems. The hope is it is a similar story in Willmar and revenue will start inching up.
"It is a concern," said Brian Gramentz, Willmar City Administrator.
The gap in sales tax revenue is expected to only get worse over the next several months as the impact of the business shutdowns and economic slowdown caused be the COVID-19 pandemic is quantified. The city won't know just how much sales tax was collected during the present situation until the late summer at the earliest.
The city is already spending some money on the local option sales tax projects, as architects and a construction manager have been hired. Construction on a few are set to take place in the next 12 to 18 months, including work on Robbins Island and Swansson Field. The hope is to start and complete all of the projects within the next four years. To do this, the city plans to bond for the projects and the sales tax revenue will be used to pay back those bonds.
However, if revenue stays down and does not meet projections, the city could find itself with a funding gap that property taxpayers will have to fill. To avoid that, the city is already having discussions about whether to postpone work on some of the local option sales tax projects until funding is on a more secure foundation.
"The local option sales tax project discussion is going to be a big one," said City Councilor Andrew Plowman.
Another funding concern for the city, and not just related to the sales tax projects, is the ability to sell those general obligation bonds. Bonds are used to fund all sorts of public projects, including the annual street improvements.
"It is a market that is changing day to day," Okins said.
Doug Green, a director at Baker Tilly, an advisory, tax and assurance firm, told the Finance Committee that while the municipal bond market has been volatile, it is still possible to sell bonds.
"It has never shut down," Green said.
Depending on the value of the bonds, the city has a few options when it comes to selling them. For smaller bonds totaling a few million dollars, for things such as street projects, local lending institutions could purchase them. But for larger bond sales, $25 million to $30 million for sales tax projects, the city would need to sell the bonds on the competitive market. Even in today's uncertain market, that is not impossible.
"We might be a little more nervous than normal, but it would get done with really good interest rates," Green said.
While it is good news that the city should be able to access financing for its projects, there are still questions about being able to pay the bonds back. Bonds for regular city projects are paid off using property tax revenue, which could also take a hit due to COVID-19.
"The citizens may face unemployment and that will impact their spending and property taxes," Gramentz said.
Then there is the step of issuing special assessments for road projects. If property owners are having problems paying their current taxes, the question the city will have to answer is whether it is willing to add even more financial pain to residents' lives.
But, if the city doesn't charge those assessments, it can't do the street projects, per state law. The law requires property owners to pay for at least 20 percent of assessable street projects if the city wants to use improvement bonds to fund the projects.
"There are decisions that are going to have to be made," Gramentz said.
If the city has to choose between bonding for road projects or recreation projects, the roads win, Gramentz said.
"Recreation comes second. Our primary job is to have roads and bridges, curb and gutters installed," Gramentz said.