Bleeding communities dry: How local government aid cuts are hurting rural Minnesota

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No group of Minnesotans are more qualified to comment on the challenges of delivering public services during a period of diminishing resources than our state’s city mayors. Minnesota 2020, in partnership with the Coalition of Greater Minnesota Cities, and Macalester College, surveyed 43 greater Minnesota mayors about the critical issues facing Minnesota cities.

As a result of large reductions in state aid, Minnesota cities have been compelled to increase property taxes at the same time that they must cut essential services. From 2002 to 2008, real (i.e., inflation adjusted) per capita state aid to Minnesota cities declined by 47 percent. Because of their relatively low per capita tax base, greater Minnesota cities are more dependent on state aid than cities in general.

The Minnesota 2020 mayors’ survey highlights the harm done to greater Minnesota cities from past aid cuts and the damage of future aid cuts from the perspective of the greater Minnesota mayors. The responses, which clearly show the strain many of the cities are under to provide critical services with less and less, do not include the impact of the $66 million cut to city local government aid (LGA) and market value homestead credits in December 2008 resulting from the Governor’s unallotments. Those cuts occurred after the survey was conducted.

Ongoing State Cuts are “Devastating” to Minnesota Cities

Given that the state of Minnesota greatly restricts the abilities of cities to generate revenue from local tax bases, it is not surprising to learn that 81.4 percent of the mayors surveyed agreed that the state has an obligation to assist in funding city services.

In light of the fact that real per capita city LGA has been cut nearly in half over the last six years, 69.8 percent of mayors felt that the state was not providing enough aid to their city, while 74.4 percent felt that the state does not provide enough assistance to cities in general.

Given that state aids and credits comprise nearly 43 percent of the revenue base (i.e., property tax levies plus state aid) of greater Minnesota cities, it is not surprising that 74.4 percent of mayors felt that the elimination of LGA would be “devastating.” Of the remaining 25.6 percent, a large majority felt that LGA elimination would be bad but manageable.

If LGA were eliminated, 79.1 percent of the mayors surveyed said their cities would increase property taxes or cut services or both.

More than 90 percent of the mayors indicated that the large state aid cuts enacted in 2003 caused increases in property taxes or cuts in city services or both.

Large majorities of the mayors surveyed indicated that LGA cuts hurt economic development (79.1 percent) and the quality of life (90.7 percent) in their cities.

In the absence of adequate revenues, most mayors (72.1 percent) indicated that they would cut parks, recreation, and libraries. Nearly half (48.8 percent) indicated that they would cut public safety.

At the insistence of Governor Pawlenty, new restrictions on the ability of cities and counties to raise property taxes-referred to as “levy limits”-were enacted in 2008. Over three-quarters (76.7 percent) of the mayors who responded to the survey agree with the non-partisan House Research Department that levy limits are not effective in holding down property taxes over the long term.

Balancing the Budget on the Backs of Minnesota Communities

Since 2002, state leaders have solved a disproportionate share of state budget problems on the backs of cities and local property taxpayers through state aid cuts. Furthermore, some state leaders-most notably Governor Pawlenty-chide local governments for a lack of frugality, despite the fact the cities and other local governments have reduced their budgets more than state government. Within this context, it’s not surprising to learn that 55.8 percent of the mayors feel that state leaders do not value the state-local partnership, while 83.7 percent believe that state leaders do not understand the needs of cities.

The plight of Minnesota local governments has been well documented by Minnesota 2020 and others, as they are compelled to increase property taxes at the same time that funding for services and infrastructure is cut. However, it is one thing to look at this ongoing fiscal travesty by the numbers; it is quite another to hear about it directly from greater Minnesota mayors who have to manage the budgets of their cities under these circumstances.

As one mayor put it, “We do a good job and I find it unfortunate that some state leaders point the finger at us for property tax increases without acknowledging their own role in that problem by cutting aid or increasing mandates.”

This mayor has aptly described the crisis of accountability that has gripped the state-local fiscal relationship. The most frugal levels of government are vilified as big spenders, while the Governor-who manages the level of government with the most rapid rate of revenue growth-postures as the champion of “no new taxes.”

Pay More and Get Less

As the majority of mayors surveyed noted, when state dollars for property tax relief are slashed, property taxes will increase or funding for public services and infrastructure will be cut. In fact, frequently both happen simultaneously.

This situation is not unique to greater Minnesota cities. It is not difficult to find metropolitan cities that are in the same boat. Nor is the situation restricted to cities. Counties and school districts have also been compelled to increase property taxes while simultaneously cutting budgets.

Thanks to unsustainable tax cuts and a collapsing national economy, Minnesota is once again on the precipice of a deep fiscal chasm. If the state responds in the same way as it did six years ago, we can expect the same results: higher local property taxes and fewer public services and investments. In short, pay more and get less.

A Balanced Approach Is Needed

No one should be so naive as to think that the state will be able to resolve the massive $6.4 billion deficit (projected structural deficit for FY 2010-11 including the impact of inflation, not counting one-time federal recovery dollars) without some cuts in aid to local governments. However, based on the mayors’ responses, Minnesota 2020 recommends a balanced approach to the crisis.

A balanced approach will not require local governments to make far deeper budget cuts than state government. A balanced approach will not shift a greater percentage of the tax burden on to those Minnesotans with the least ability to pay through increases in regressive property taxes, while avoiding at all costs increases in progressive income taxes. Finally, a balanced approach rejects politically expedient dogma that automatically precludes the option of increasing state revenue.