Minneapolis hit hardest as cities glimpse possible loss of state aid

  • Article by: LAURIE BLAKE , Star Tribune
  • Updated: December 16, 2008 - 12:48 PM

With state budget cuts almost a certainty, cities get a glimpse at possible losses in state aid.

In the final days of their 2008 budgets, Minnesota cities are anxious to learn just how much state aid they will lose as the governor and legislators close a looming budget gap.

To relieve some of the uncertainty, the League of Minnesota Cities on Monday circulated the first city-by-city estimates of potential cuts. The biggest potential loser appears to be Minneapolis, which could be out between $3.7 million and $20 million in December, depending on how deep cuts go.

The league estimates that all cities will lose some money -- either from local government aid or promised state reimbursement for homestead credits on property taxes.

"We are not trying to be alarmist,'' said league lobbyist Gary Carlson. "We are trying to help our cities understand as soon as possible what the magnitude might be.''

Minnesota has a projected deficit of more than $5 billion over the next 2 1/2 years and is facing an immediate gap of more than $400 million for the budget year that ends in June.

Local aid to cities is paid by the state twice a year, in July and December. The final round of checks for the year goes out on Dec. 26. The question that cities have is how much will be coming.

Because it's near the end of cities' budget years, which run January through December, Burnsville city manager Craig Ebeling said, "it's not as if we could go and unspend those dollars that have been spent.''

Burnsville could lose an estimated $301,600 to $480,300, according to the league's estimates, all in what were supposed to be state-funded property tax credits for low- and middle-income homeowners through the Market Value Homestead Credit -- tax breaks that the city has already passed on to homeowners. The only option for the city now is to take that money out of reserve fund balances, Ebeling said.

With Minneapolis facing the largest hit, city finance officials say getting the news only days before the end of their fiscal year leaves them no choice but to absorb the loss by drawing down their budget reserve. That fund, last projected to end the year at $53 million, represents 15 percent of the city's general fund.

Mayor R.T. Rybak last week told legislators that the city is willing to shoulder its fair share of absorbing the deficit. But he asked them not to punish the city for trying to do five-year budgeting that prudently keeps a reserve. He said the only ways to offset aid cuts will be raising property taxes, cutting public safety spending or delaying public works spending.

In Crystal, a city where local government aid makes up about 20 percent of the city budget, officials say a drop in state aid also will come out of cash reserves. Said Charlie Hansen, city finance director, "It's so late in the year that nobody can do anything to compensate for this now.''

To cope with more cuts next year, some cities are talking about freezing hiring or cutting capital projects. But Crystal will wait to see real numbers before getting serious about cuts, Hansen said.

"These issues are so complex that until the state comes out with their own definitive statement of what the cut is going to be, nobody really knows,'' he said.

In St. Paul -- which stands to lose as much as $9 million this month, the league estimates -- Mayor Chris Coleman has already started to plan for cuts in 2009. Last week he announced a hiring freeze and told city department directors to plan for 20 percent reductions in their budgets.

Most cities have just finished adopting a 2009 budget, and it will be another year before they could change their tax levies to make up for lost state aid, Carlson said. The league has asked legislators to consider allowing cities to recertify their 2009 budget early next year once state aid reductions are clear, so they could have the option of increasing local taxes to make up the gap.

Woodbury, Edina and Minnetonka are more insulated from state budget turbulence because that are too property rich to receive local government aid and their budgets are based on the local tax levy.

"It makes us less vulnerable to the state problems,'' said Minnetonka city manager John Gunyou, "both to the state economic and political problems.''

Which cities get local government aid and how much they receive has been in need of review for 20 years, Gunyou said.

But the cities that get little or no local government aid still will need to offset any losses of state funds from the homestead credit program.

Another question raised by the budget crisis is why cities must continue to act as the middleman in delivering state homestead credits on property taxes, said Woodbury Mayor Bill Hargis.

The potential loss of some of that money, as predicted by the league, could force cities to pay for state tax breaks out of city reserves.

"We would like the state to give property tax relief direct to the taxpayer and keep the cities out of the middle,'' Hargis said.

Star Tribune staff writers Steve Brandt and Chris Havens contributed to this report.

Laurie Blake • 612-673-1711

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