NEW ULM - A new finance report released Thursday by State Auditor Rebecca Otto adds new facts to the debate over Local Government Aid (LGA) and property tax.
The Minnesota City Finances Report for 2009 shows that Minnesota cities have increased their reliance on property taxes to meet their financial needs while reducing expenditures and revenues at the same time.
The reductions are part of a long-term trend for Minnesota cities.
Since 2000, city revenues have dropped 11 percent and city spending has dropped 8 percent after adjusting for inflation. Additionally, cities have decreased their capital outlay expenditures since 2006, which is money used for road repairs and replacement of equipment.
Also occurring during this time, the percent of total city revenues derived from state and federal aid decreased from 30 percent to 26 percent while the percent of total city revenues derived from property tax increased from 23 percent to 37 percent.
Finally, the report shows that smaller cities disproportionately bare the weight of the trends.
"What this report shows is that the statistics don't coincide very well with the rhetoric we've heard over the years. For example, when Gov. Pawlenty was in, he said 'We've got to cut, cut, cut' and 'Cities, you're wasting money or not doing a good job at being fiscally conservative.' The fact is that we've been fiscally conservative for quite some time."
Brian Gramentz, New Ulm City Manager
The total revenues of Minnesota cities dropped 0.3 percent from 2008 to 2009. But, total revenues for cities with populations over 2,500 only dropped 0.2 percent. Cities with populations under 2,500 dropped 1.2 percent.
On the expenditures side, Minnesota cities dropped 3 percent. However, cities with populations over 2,500 only decreased 2 percent while expenditures for cities with populations under 2,500 decreased 6 percent.
The numbers show support for DFL Gov. Mark Dayton's argument that cuts to LGA only shift the cost to property taxes, which he as called the most regressive form of taxation. He argued that property taxes fall harder on low- and middle-income families.
Conversely, Minnesota Republicans have traditionally argued that city governments have failed to make sufficient cuts to spending when the entire state has been making budgetary sacrifices to deal the economic climate. The report presents a challenge to the Republicans' position because it shows that, after adjusting for inflation, city governments have been significantly shrinking their budgets even with reductions in LGA.
New Ulm City Manager Brian Gramentz said that the findings are not particularly surprising to city administrators, who have been stating that LGA cuts directly result in property taxes increases. He explained that the results of the report finally gave cities evidence to back up what they already know.
"What this report shows is that the statistics don't coincide very well with the rhetoric we've heard over the years. For example, when Gov. Pawlenty was in, he said 'We've got to cut, cut, cut' and 'Cities, you're wasting money or not doing a good job at being fiscally conservative.' The fact is that we've been fiscally conservative for quite some time," said Gramentz.
He said the trend in the last decade to cut LGA first has resulted in more instability at the local level. He explained that cities, especially smaller ones, have had to reduce capital improvement projects and stretch equipment replacement schedules, which makes the cities more susceptible to unplanned events.
"If you would normally replace a police car every two years, instead we're now doing it every three or four years," said Gramentz, "We have reduced the budget in that way by stretching out how much we put away each year, but it makes us more susceptible if something breaks down."
Gramentz added that LGA traditionally worked as a safety net against similar incidents, but the reductions to LGA has put cities out on their own.
He said that his worry is that the state politicians will miss the point and put limits on cities' ability to raise property taxes, which he said would only make the problem worse. He said the report could allow cities to better plead their case.
(Josh Moniz can be e-mailed at firstname.lastname@example.org)