City cuts NRP projections by $20 million

Neighborhood-based program may face another financial hit – though it’s just a guess

A new city financial forecast says the Neighborhood Revitalization Program (NRP) Phase II will take another $20 million cut, dropping Phase II money to $63 million, roughly 25 percent below last year’s estimates.

It is the latest in a series of budget hits for NRP’s second decade. Program backers initially anticipated $180 million for 2001-2009. At $63 million, NRP Phase II would have just one-third of that.

Since the early 1990s, NRP has allowed neighborhood groups to direct millions of dollars toward improving area housing, safety, parks, schools and more. It was to be a 20-year, $20-million-a-year program.

Phase II was already less than half the size of Phase I, and if the new prediction is true, neighborhoods will have to scale back plans even more.

Higher property taxes that some city-subsidized redevelopment projects pay goes to NRP. Property tax law changes, market shifts and the downturn in key commercial property values have contributed to NRP’s projected nosedive. 

Some city leaders caution that the numbers are only projections – and such estimates can change. Others question how the forecast could have changed so dramatically in one year.

Bob Miller, NRP executive director, said releasing projections could create problems for the program in two ways. People could say, "The sky is falling," and bail out of neighborhood involvement. Or, neighborhood leaders could rush their planning, a sort of "run on the bank" before the money runs out, he said.

"Either of those cases is disastrous," Miller said.

Pat Born, city finance director, said he expected to update the numbers in a few months, with likely changes by year’s end.

So why release an estimate now?

"Our general practice is when we do have a forecast that has this much swing in it, we don’t like to keep that to ourselves," Born said. "We like to air that out a little bit and ask people to make comments on it. Š I think we could be criticized equally so if we were to have kept it to ourselves."

Political fallout

The announcement could provide a flashpoint in mayoral politics. Mayor R.T. Rybak and challenger Hennepin County Commissioner Peter McLaughlin both serve on the NRP Policy Board, which includes representatives from various government bodies and labor, nonprofit and neighborhood groups.

McLaughlin has repeatedly charged that Rybak is hostile to NRP.

Rybak said he is open to new ideas for NRP, noting the city has already gone the extra mile by loaning NRP money from a reserve fund. "The city, the county, the library, the parks need to work together to see if there is a way we can get resources into the system," he said.

McLaughlin said he wanted to make sure the mayor and city staff were not creating a false crisis – what he called "a financial straw man."

As McLaughlin explained it, the city could create an NRP crisis that it would solve simply by changing financial assumptions, with no crisis to begin with.

Further, he didn’t want the new forecast to erode NRP support, McLaughlin said. Some people could say, "Well, if that is all the money that is left, we may as well do away with it," he said. "I don’t want a momentum started in that direction."

City Council President Paul Ostrow called the forecast "disappointing news."

"To see the magnitude of this difference, is certainly something we didn’t expect," he said. "Councilmembers are just getting their arms around this information."

Neighborhood reaction

Miller sent an alert to neighborhood leaders June 29. Some neighborhood groups are still just getting the word.

Marian Biehn, staff member for the Whittier Alliance, said her neighborhood has an approved $2.4 million Phase II plan. Neighborhood leaders are meeting with NRP staff to understand what the new projections mean.

"I hear that we have to be very, very cautious about our NRP money," she said.

Norma Pietz, the Lyndale Neighborhood Development Corporation’s executive coordinator, wondered if her neighborhood would get any NRP Phase II money at all.

"It started out at one amount, and then it was less and then it was less again and then it was less again," she said.

What happened?

Most neighborhoods are finishing up Phase I plans, Miller said. Eleven neighborhoods, or one out of six, have approved Phase II plans, totaling $5.5 million.

NRP began getting Phase II money in 2001. It received $20 million in 2001, $11 million in 2002, $10.7 million in 2003 and $4.7 million in 2004, NRP data said. Contributions are projected to plummet to $717,155 in 2005, city data said.

The first NRP Phase II funding crisis hit after the state changed property tax laws in 2001, reducing tax rates on commercial property compared to residential property. Commercial buildings paid less, cutting the money available for NRP.

The City Council approved a fix, which included a city loan. However, it lowered its estimate of future NRP funding. Councilmember Barret Lane (13th Ward), the plan’s architect, said the Council knew at the time the NRP estimates could change based on properties’ taxes paid.

In 2004, the city estimated NRP would get $36.7 million from property taxes in 2005 through 2009. The new estimate is NRP will receive $16.6 million during that time span, a 51.5 percent drop.

Jack Kryst, the city’s director of development finance, said the most important factor affecting the forecast is that properties contributing to NRP have had significant market value drops and resulting property tax decreases. For instance, Riverside Plaza in Cedar-Riverside had its market values cut by $44 million. City Center’s value dropped nearly $21 million.

The city could recoup some of the loss by raising its tax levy – the rate applied per dollar of property – but booming residential valuations have forestalled that.

"There is a certain irony in the fact that if any municipality in Minnesota grows [its] tax base and simultaneously keeps its levy rate low, they will have reduced [NRP] revenue," Kryst said.

When NRP attacks

Miller asked how much the current estimates could be trusted if they are so far off in just one year.

"I am not a CEO of a private company," he said. "But I can tell you if my chief financial officer came into me and said, ‘Gee, I think we may have missed a little on our revenue projection for the year and it is going to be off by a 51.5 percent,’ I don’t know how long I’d be around."

Miller had a number of questions about the city’s estimates. For instance, he said the city assumed that key tax-increment properties, such as City Center and Neiman Marcus, would not rebound for years. He called "ludicrous" city estimates that the 2004 downturn would continue at the same level for 2005-2008.

Born said the city is taking as cautious a view as possible. It obviously overshot with its earlier NRP revenue estimate, he said. City Center was getting improvements and would increase in value – but city staff was not ready to make an assumption about when that would happen.

Miller said the city had other options to increase NRP funding. One is to use a different investment strategy to earn more interest on NRP reserve funds, he said.

Further, the city could delay the repayment of the loan it made to NRP, extending the repayment and freeing up more money, he said.