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Duluth's fees could face scrutiny

A ruling handed down last week by the Minnesota Supreme Court regarding fees charged by the city of St. Paul could have implications for Duluth as well

Duluth doesn't rely as heavily on citywide fees to pay for its street work as St. Paul does, but its own practices could be called into question by the court decision.

Two churches — First Baptist Church of St. Paul and the Church of St. Mary — filed suit to challenge St. Paul's assessment of a right-of-way fee about five years ago. And on Wednesday, the Minnesota Supreme Court concluded, in essence, that the city fee constitutes a tax against two traditionally tax-exempt entities.

Justice David Lillehaug wrote that a right-of-way fee that St. Paul collects annually "is a 'revenue measure benefiting the public in general' that draws its authorization from the power to tax. Accordingly, the city's right-of-way assessment is a tax subject to constitutional restriction on the taxing power."

The court sent the case back to a Ramsey County District Court for reconsideration.

David Montgomery, chief administrative officer for the city of Duluth, said it's not yet clear what the decision will mean for St. Paul, much less Duluth.

"The case is still in play," he said. "There are some clear indicators in there, but we're still looking through that to determine what the implications may be."

St. Paul City Attorney Samuel Clark reacted by issuing a statement that said: "With today's Minnesota Supreme Court decision, the city has maintained its ability to collect assessments through its right-of-way program. In other words, it's not a question of if the city can collect assessments but how it goes about doing so."

Jack Hoeschler, the attorney who represented the plaintiff churches in the case, predicted that the Supreme Court ruling "tolls the bell" for broad street fees.

"These services create a general benefit for the public. That is to say, everybody shares in the benefit of having the streets plowed and swept and that kind of stuff. But it doesn't create a so-called 'special benefit.' It doesn't increase the value of my property to have the street system maintained. We all get a general benefit from that, but we don't receive a 'special benefit,' " he said.

Nearly one-third of St. Paul's total property value is controlled by tax-exempt entities, according to government estimates, and fees have enabled the city to tap many of these organizations.

While a smaller slice of property value is under the control of tax-exempt organizations in Duluth, Montgomery said it is still a significant piece.

Duluth Mayor Emily Larson said that while there are similarities between the street fees charged by both cities, the loss of that revenue would present a much more dire challenge for St. Paul, which relies almost exclusively on the assessments to fund its street maintenance.

The city of St. Paul collects about $30 million per year in right-of-way fees.

Meanwhile, Duluth annually collects about $2.8 million from a street maintenance fee and a little less than $1.5 million from a fee for streetlights.

Duluth has taken steps to phase out its streetlight fee, and Larson said she intends to continue to move in that direction.

City Council President Zack Filipovich, who has been a proponent of eliminating the fee, said: "I'm really proud of the work that I and Councilor (Joel) Sipress have done on the streetlight fee. And after a conversation with Mayor Larson, I understand that is going to continue to be in the administration's budget. So I'm thankful to her. ... And as for the street fee, that might be a bigger conversation to have."

Filipovich raised a philosophical concern with fees that fail to differentiate between individuals of modest means versus people who are more affluent.

"Fees are a more regressive way for the city to collect revenue, and it's my belief that we should have as progressive of a system as possible," he said.

Montgomery said the city has been incrementally reducing its streetlight fee in recent years by shifting the financial burden to property taxes.

He said a similar transition from the street maintenance fee to the local tax levy also could occur "after we get a better handle on what's going on with this ruling and what the implications are."

Larson concurred, saying: "This really could have some impact, as we look at our budget for next year, but we haven't committed to what that would need to be or how that looks."

Hoeschler suggested the city had better consider its options.

"Duluth needs to be really concerned about this, because the Supreme Court essentially said: Come on. Don't play this fee game. If you've got to raise money, raise it as an honest tax and be subject to the rules with respect to taxes," he said.

Hoeschler characterized cities' increasing reliance on fees instead of property taxes as "political smoke-blowing," that allowed elected officials to claim they were holding the line on taxes even as they increased the financial burden on their constituents.

But Larson said the fees adopted in Duluth were the product of a very public process, including debate about alternative options.

Larson said she and most members of the Duluth City Council never saw a street fee in and of itself as an adequate tool to pay for street maintenance and improvements.

"This has not been seen as the long-term strategy that the city would be relying on, as St. Paul has for 100 years, which is why we have worked hard the past few months to build a path toward a long-term budgeting process that would take into account all street-related needs," she said.