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05-27-2025 (Workshop - Budget Kickoff)HUTCHINSON CITY COUNCIL 2026 BUDGET KICKOFF MINUTES TUESDAY, MAY 27, 2025 — 3:30 PM CITY CENTER — COUNCIL CHAMBERS 1. Call to Order Mayor Gary Forcier called the workshop to order at 3:30 p.m. Council Members present included Pat May, Chad Czmowski, Tim Burley and Dave Sebesta. Others present were: Matt Jaunich, City Administrator, Andy Reid, Finance Director and other city directors. 2026 BUDGET KICKOFF REVIEW 2. 2026 Budget Kickoff Matt Jaunich, City Administrator, presented before the Council. Mr. Jaunich noted that today's workshop is to begin the 2026 budgeting season. Mr. Jaunich noted that the purpose of today's workshop includes reviewing the budget calendar, reviewing the City's compensation system, looking at some historical data, reviewing items that staff has identified as items/concerns that need to be addressed and getting direction from the Council on what they would like to see during the 2026 budget preparation season. Mr. Jaunich further noted that setting the annual budget is one of the biggest policy decisions of the City Council. The City's budget documents drive the work of the city and are the forces behind achieving the City's Mission Statement. Mr. Jaunich reviewed the City's mission statement, vision statement, the seven core areas of focus which include public safety, health & recreation, transportation, economic development, environment, good government and housing. Mr. Jaunich spoke about statements identified in the City's last strategic plan. Those statements included wanting to be known as a destination place for recreation, art and leisure; wanting to have a growing, diverse economy with a skilled workforce; wanting to have adequate, affordable housing for all; wanting to have welcoming and safe city facilities to service current and future generations; wanting to have cost effective, reliable and sustainable energy and practices; wanting to have high quality, multi -modal transportation and infrastructure systems; wanting to have active citizen engagement, participation and involvement and wanting to have fiscally responsible management to serve community needs. Mr. Jaunich also reviewed five long-term goals the Council should consider every budget season. Those goals include: 1. What should future tax levies look like? 2. What levels of services should the City perform and provide in the future? 3. What is an acceptable level of debt? 4. What is our level of investment in technology and equipment, and what period of payback is acceptable? 5. What are our future infrastructure needs (roads, utilities, buildings, etc.) and how are we going to pay for them? Mr. Jaunich reviewed the City's compensation system. The system includes about 130 full-time equivalent positions; on average the city issues about 364 W-2s every year (includes seasonal employees); overall payroll (wages and benefits) for all funds in 2024 was just over $14.01 million; 67% of the 2025 general fund goes to wages and benefits; the average estimated hourly rate of a full-time/part-time city employee in 2025 is $35.93; the average estimated salary of a full-time/part-time city employee in 2025 is $69,319; the average estimated benefit package of a full-time/part-time city employee in 2025 is $23,706; the City has two unions and the current system has been in place since 2017. Mr. Jaunich reviewed current policy statements including the yearly compensation plan objectives and Core Value Statement 46 (6.8 The City of Hutchinson will attract and retain quality employees). Key documents that determine the city's compensation system include the Compensation Plan approved annually, the part- time/seasonal/temporary position & firefighters compensation plans; Keystone Compass Market Report; City's defined market area, Keystone Job leveling System and 2016/2021 wage studies. Four strategies are used to meet the City's compensation plan objectives for the City to compete for talent in the marketplace: 1. What is the city's market for talent? Who do we compete with? 2. Where does the City intend to position its pay program relative to the market? 3. What does the City intend to pay for? 4. How does the City administer its pay program and grant pay increases? Mr. Jaunich showed the identified City of Hutchinson market area which includes cities and counties. This market area list was approved by the City Council and any changes to it would need to be approved by the City Council. A compensation study is scheduled for 2026 and the City's compensation consultant has recommended the list be updated, such as a smaller market of cities — reducing the list from 29 to about 15 and eliminating counties. The plan is to update this list in 2025 between staff and Council. City positions are benchmarked off the market data collected from the City's peer group. The same peer group is used for all position for fairness throughout the organization. Market data, along with internal job evaluations, help determine where employees get placed on the pay grid. Mr. Jaunich reviewed the City's compensation structure which includes all jobs getting calibrated internally and with the market. Internal employee evaluations are conducted and assigned points Knowledge Skill and Competence; Responsibility and Accountability; Job Complexity; Contacts and Interpersonal Skills and Working Conditions. The City Administrator and Human Resources Director, working with the compensation consultant, have the final say on point assignments. The pay system is based on the market median and salary ranges are set from 80% of the midpoint to 120% of the midpoint. The midpoint is set at 100% of market median. Mr. Jaunich also explained how the City pays its employees, which is based on performance. Mr. Jaunich further detailed the City's pay grid and market comparisons. The biggest driver of the city's tax levy are employees' wages and benefits. Mr. Jaunich noted that the next steps related to the compensation system includes updating the labor market area, completing a wage study in 2026 and revising the Merit Increase System, update performance evaluation system, and evaluate new staffing requests with department revenues and expenses. Mr. Jaunich noted the current policy statements used when developing the budget which includes the Financial Management Plan, Revenue Policy and operating budget. Mr. Jaunich reviewed tax rate comparisons of Hutchinson with other McLeod County cities as well as with other regional center city rates. Hutchinson is the second lowest in the county and ranks in the mid -range amongst regional centers. Mr. Jaunich spoke about the price of government which is the percent of every dollar earned going to pay for City services, excluding electric and gas utilities. Hutchinson is at approximately 2.5% for a total cost of government which is rather comparable to other regional centers. Mr. Jaunich provided data on economic comparisons, the 10-year tax rate trend, the 10-year total tax levy trend, the total market value history, the total taxable market value history and the total tax capacity history. Mr. Jaunich explained that the City's tax rate is determined by the tax levy and tax capacity and tax capacity is determined by the market value. The City's modest tax increases over the past ten years have been offset by large increases in the city's market values. Since 2018, total market values have exceeded a billion and are the highest in the history of the City. 2025 values increased by 1.7% over 2024. Taxable values are matching market values and the 2025 report shows values increasing by only 0.9%, the lowest increase since 2014. Tax increases without value increases end up having a negative effect on the tax rate. The valuation changes over the past few years have shifted more of the City tax burden onto residential properties. While commercial and industrial properties likely will see a tax decrease as their valuations have remained flat or had minor changes. As values increase, the market value homestead credit decreases, impacting residential tax bills. In general, the City's market value increases have outpaced the tax levy increases, lowering the tax rate, except for the last two years. With the lower market values and taxable values, the pressure to maintain tax rates and/or no tax rate increase will be extremely difficult. Mr. Jaunich further reviewed historical budget numbers including the tax levy from the last seven years and tax levies as a percentage. Mr. Jaunich provided information on certified city levy changes for 2025 for other McLeod County cities and throughout the state. The average tax levy increase was 6.2% within the county and the average state-wide tax levy increase was 7.7%. The average regional center tax levy increase was 8.3%. Mr. Jaunich then provided a very preliminary general fund budget for 2026. This includes wages and benefits expected to increase by 6.2%. This includes increased health costs of 5% and costs associated with MN Paid Family Medical Leave. This includes adjustments for full-time positions that were not factored into 2025. Other expenditures are assumed to remain flat at this time. A current look has a 9.4% levy increase to balance the budget. No "new" revenue streams are included. Staff is unsure of State impacts at this time. All other revenues are at 2025 budgeted amounts. Revenues are assumed to remain flat at this time. A 1 % tax levy increase is equal to $67,292. Mr. Jaunich presented a preliminary general fund five-year budget. Mr. Jaunich provided a list of things to think about when establishing the 2026 general fund budget — such as program changes — need for increase/decrease?; enterprise fund transfers to the general fund; analysis of certain line item projections; performance increase percentages; fleet/facility funding; funding of wages and benefits; inflation impacts; payroll allocations (general vs. enterprise); continued discussion on general staffing levels and service level needs/wants; new position requests/retirements; election costs with an election year; appropriate CIP funding and needs; state budget/tax agreements; charges for service/fee increases; local government aid; state legislative impacts; moving start of performance increase to January 1; funding of major/special projects; wage survey; impact of selling event center; sales tax and public wants/needs. Mr. Jaunich spoke about use of LGA funds. He noted that the City is set to receive $3,111,750 in LGA in 2026 which is an increase of $8,283 from 2025. He noted that 50% goes to the general fund and 50% goes to various aspects of the capital improvement fund. Capital Projects Fund is for various projects currently not designated. He noted that 2026 will be the third year of the Fleet designation of Capital LGA ($50,000). He also noted that 2026 will be the fourth year of a 50150 split with LGA between the CIP and the general fund. Mr. Jaunich also noted its possible there will be LGA cuts from the State as they work on finalizing a budget. Mr. Jaunich then reviewed the debt management plan. He noted that the 2026 increase is projected to be at about 3.9%. He explained that increasing interest rates have/will impact future debt decisions and rising project costs have put pressure on increasing the debt tax levy. He noted that the debt levy has not kept up with inflation. He also explained that special assessment rates need to be reviewed and the City still has future debt needs for heavy equipment and the fire truck debt has to be finalized. Lastly, future facility need costs are rising. Mr. Jaunich also reviewed major projects potentially scheduled for 2026. These include: fire ladder truck, Michigan Street improvements, HATS storage building/fuel site, other equipment/vehicle replacements, campground expansion, unfunded splash pad, other storm/water/wastewater and other facility improvements, and a Creekside office expansion. Mr. Jaunich then reviewed the various current City fund balances. Mr. Jaunich noted that the target cash balance is based on 50% of the 2025 budgeted operating expenses plus the 2025 debt service payments. It is a measure of liquidity and the ability of the enterprise fund to pay for its short-term obligations. Future capital needs and debt service are not taken into consideration when looking at the target cash balance. Mr. Jaunich also reviewed special projects fund balances which include the Community Improvement Fund, Capital Projects Fund and the Public Sites Fund. Mr. Jaunich also reviewed a list of staff concerns or items in need of being addressed/watched These include: another challenging year?; staff is in need of guidance, direction and a voice from the City Council on the public's needs/wants; levy expectations and meeting costs of employee wages/benefits; growth of salaries/benefits is the biggest cost driver; funding for splash pad/pickleball courts; construction/replacement costs increasing — no funding adjustments have been made to address these increases; examine all revenues and expenses; regulatory impacts to Water and Wastewater infrastructure; moving pay adjustments to January I"; ; selling of City assets and impact on operations; Event Center operations; increased costs with an election year; additional staffing requests; pay review/performance review/wage system review; interest rates/inflation; funding for heavy equipment/fleet and fire ladder truck; wage allocations; special assessment rates; sales tax extension; and legislative impacts. Mr. Jaunich then reviewed legislative impacts for the 2026 budget and beyond. The impact of paid family/medical leave is an estimated annual cost of around $65,000 (goes into effect in 2026); the impact of Sick and Safe Time; future of City sales tax requests (moratorium still in place); PFAS and other environmental regulations; zoning and land use authority; bonding bill; threats of LGA cuts currently taking place and adult -use cannabis. Mr. Jaunich also noted current challenges/constraints which include balancing the growth of the community vs. the costs associated with that growth; increased facility maintenance costs; funding dedication not keeping up with inflation/rising costs; increased labor costs; tax levy appetite and the pressure from the public to staff to do more within the community; defining needs and wants and what is willing to be paid for; and sales tax availability. Mr. Jaunich also asked the Council to consider their overall goals for the community and how do we budget to support that; wants vs. needs — who is defining that? He asked them to think about what their expectations are — what does staff need to provide the Council to meet their objectives? What data/information has staff not provided the Council that you want to see? Mr. Jaunich asked the Council's thoughts/ideas on the 2026 budget: 1. tax levy goal? — 0%, moderate increase, or significant increase; 5-year budget plan called for an annual general levy increase of 6-7%; "very early look" calls for something around 6.8%; 2. Any services Council would like to see provided and/or increased/decreased in 2026? — Park & Rec, streets, equipment, etc.; 3. Is there a specific project/item the Council would like to see budgeted for and/or done in 2026? — splash pad, housing, infrastructure, etc. "Think Strategic Plans"; 4. Any fee/rate/transfer changes to look at in 2026? — utilities, licenses, rentals, programs, park dedication, etc. 3. Adjournment Motion by Czmowski, second by Sebesta, to adjourn the workshop at 5:20 p.m. Motion carried unanimously. ATTEST: Gary T. Forcier Matthew Jaunich Mayor City Administrator