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Are recession rumors true? - Brainerd council discusses finances ahead of budget approval

Brainerd city hall. Brainerd Dispatch file photo.

Is an economic recession in Brainerd's near future?

A potential looming financial downturn has been talked about off and on since the country started rebuilding after the 2018 recession. Worries of another catastrophe are partially to blame for disconnect among Brainerd City Council members as they struggle to agree on a final tax levy for 2019.

Brainerd residents will likely see an increase in their property taxes after the city council votes on a final tax levy later this month, but how much is still up in the air.

Council members did not agree when setting the preliminary levy at a 6 percent increase back in September, and opinions still differ with less than week to go until the Truth and Taxation hearing, when residents can voice their concerns. The council has until Dec. 28 to pass the final levy—which can be lower but not higher than 6 percent—and will likely do so either Dec. 10 at the Truth and Taxation hearing or at its regular meeting Dec. 17.

When polled at the last budget workshop Nov. 26, the percentage increase council members said they want to see for the final tax levy ranged from 2.8 to 6 percent, with council member Gabe Johnson on the low end and Mayor Ed Menk siding with council members Kelly Bevans and Kevin Stunek on the high end. Menk, who will not vote on the final measure unless there is a tie, has been vocal about raising the levy enough to give the city a nest egg for the future, recommending a preliminary levy as high as 10 percent in September. During a budget workshop earlier in November, Menk said he feared an economic recession could be in the near future, citing that as a reason to give the city a nice savings account.

Johnson criticized the mayor in November for wanting to raise taxes so much if he thinks a recession could be imminent.

But how legitimate are those recession concerns?

Edward Jones Investments expects economic growth to slow down some but still continue through the next couple years. According to the investment firm's fourth quarter 2018 economic outlook, "most signs—including the positive but flatter yield curve, rising index of leading indicators and the PMI showing strong manufacturing growth—point to solid growth." Those indicators, the report goes on to state, "suggest predictions of a recession looming in 2020 are premature" barring a major unpredicted event.

Consumer spending continues to power the economy, Edward Jones reported, noting the unemployment rate is below 4 percent and continuing modest wage increases suggest even more job growth ahead.

As economic growth continues at a faster rate the usual, however, shortages in various industries are likely to spread, leading to rising wages and costs, the report states.

"But we think fierce competition and cost-cutting are likely to keep inflation near current levels, which are within the Federal Reserve's comfort zone near 2 percent," Edward Jones reported.

Brainerd's housing market seems to back those assessments up, as local realtor Chad Schwendeman, of Exit Lakes Realty Premier, referred to the city's housing situation as a seller's market, meaning there are fewer homes for sale than there are buyers, which drives up prices.

"There's a lot of things we're reading as saying the market's going to correct due to interest rates," Schwendeman said. "It's been really a pretty strong seven-year run, and so we're anticipating next year should be a pretty strong year, and then probably 2020 going into election year we're going to see a correction."

With 523 homes sold in Brainerd in 2017, Schwendeman said the average price was $188,941. Through Nov. 27, 2018, Brainerd saw 501 homes sold for the year at a slightly higher average of $214,919.

The median price of homes on the market in Brainerd right now—according to Dolly Matten, executive director of the Greater Lakes Association of Realtors—is $134,000.

Levy effects on taxes

When presenting options to the council, Brainerd Finance Director Connie Hillman used a home valued at $120,000 as an example, showing a 2.8 percent levy increase would leave property taxes for those residents relatively unchanged. A 6 percent levy increase would see those homeowners paying about $25 more in property taxes a year.

With the average and median numbers from Schwendeman and Matten in mind, the following is the annual change in property taxes for residents with homes of various market values:

House valued at $134,000:

• No levy change: $19.80 decrease.

• 1 percent levy increase: $11.57 decrease.

• 2 percent levy increase: $3.32 decrease.

• 3 percent levy increase: $4.92 increase.

• 4 percent levy increase: $13.16 increase.

• 5 percent levy increase: $21.41 increase.

• 6 percent levy increase: $29.65 increase.

House valued at $214,000:

• No levy change: $36.07 decrease.

• 1 percent levy increase: $21.15 decrease.

• 2 percent levy increase: $6.21 decrease.

• 3 percent levy increase: $8.71 increase.

• 4 percent levy increase: $23.63 increase.

• 5 percent levy increase: $38.56 increase.

• 6 percent levy increase: $53.49 increase.

On the business side, Hillman also ran the numbers for commercial property valued at $363,500:

• No levy change: $119.58 decrease.

• 1 percent levy increase: $70.22 decrease.

• 2 percent levy increase: $20.80 decrease.

• 3 percent levy increase: $28.56 increase.

• 4 percent levy increase: $77.91 increase.

• 5 percent levy increase: $127.34 increase.

• 6 percent levy increase: $176.69 increase.

When last polled, council members Dave Badeaux and Jan Lambert were keen on a 3.5 percent increase, while council member Dave Pritschet liked 4 percent. Council member Sue Hilgart—who agreed with Johnson on 2.8 percent in September—said she could be persuaded to 4 or 6 percent, depending on what happens to city hall.

Aside from the budget, council members are also split on whether to repair the various issues plaguing the current city hall building or to tear it down and build a new multimillion-dollar facility next door. Johnson and Hilgart want to fix the current building, while Badeaux is on the fence, and the rest of the council—including Mayor Menk—wants to see a new city hall. Hilgart said at the last budget workshop, if the money goes toward fixing city hall, she would vote for a 6 percent levy increase. If a new city hall is the final decision, she said her vote would be 4 percent.

Hillman previously said she worries that a 2.8 percent levy increase would not be enough to bond for facilities needs, even if current buildings are updated instead of constructing a new city hall.

The council's Truth and Taxation hearting and at 6 p.m. Monday, Dec. 10, at city hall.