Cities wean themselves from state aid

Ten years into an era of reduced state aid, many metro cities have trimmed down, wised up and stopped expecting any of the funding that used to help them pay for plowing, police, parks and other services.

The regrouping is remarkable given the sky-is-falling reaction when the cuts to local government aid (LGA) first hit in 2003 to help close a state budget gap.

In the years since, cities spent reserves, raised property taxes, cut services and reduced staff to make ends meet and become less dependent on aid from St. Paul.

As they prepare this month to certify 2013 budgets, more than 60 percent of metro cities have stopped getting LGA entirely, and others have stopped counting on it for operating cash.

"As far as LGA is concerned, we don't expect it anymore," said Heidi Tumberg, finance officer for Excelsior. After raising property taxes to make up for the $130,000 it once counted on in state aid, "We have kind of weaned ourselves off of that and we are not ever going to put it back in our budget because it's so unreliable," she said.

South St. Paul has made a similar move. The city received almost $3.3 million in LGA in 2002, but in 2012 that was down to $1.6 million.

After spending years scrambling to make up for the erosion of LGA dollars, the city has stopped counting on a specific amount; it now sets aside any aid that does come through for park and street improvements or equipment purchases, which can be delayed if necessary so "the precipitous change of local government aid doesn't cripple us as it did in the past," said City Administrator Stephen King.

Many municipalities have taken the same approach, said Gary Carlson, director of intergovernmental relations at the League of Minnesota Cities. "What South St. Paul is doing has become commonplace."

City officials are waiting warily for the state budget forecast due to be released Wednesday -- a $1 billion deficit has been projected -- and to see what Gov. Mark Dayton will propose for LGA in the budget he will deliver in January. A legislative study group is also expected to deliver a report on local government aid in December.

Diminishing program

State legislators began LGA in 1971 to provide property tax relief and ensure that local governments could meet their needs, according to the House Research Department.

Initially, all cities, townships and counties received payments. Counties were dropped in 1992 and townships in 2002.

By the late 1980s and early '90s, legislators became concerned about big differences in the amount of aid going to similar cities. One legislative analyst remembers: "People were claiming that you could get a better distribution if you just threw the money out of the back of an airplane."

The state revised the formula, hoping to tie aid more directly to cities' unique needs, but it was not until 2003 that Gov. Tim Pawlenty, facing a budget deficit of $4 billion, forced a major change.

He insisted that legislators eliminate "grandfathered" aid guarantees and deliver LGA based strictly on a formula for current needs. The formula has been tinkered with almost yearly since.

Now, 124 of the state's 853 cities receive no LGA and most others receive much less than they once did, Carlson said. By his count, 89 cities in the seven-county metro area -- about 60 percent of all metro cities -- are scheduled to receive no state aid next year.

In total, state aid has dropped from a high of about $565 million in 2002 to a recent level of about $427.5 million, Carlson said.

In Richfield, to cover the loss of aid that accounted for 20 percent of its operating budget, the city raised property taxes by almost 7 percent in both 2010 and 2011, and by 4 percent for 2012, said City Manager Steve Devich. At the same time, the city reduced staff and cut programs.

"The only thing we didn't reduce was fire and police on the street," Devich said.

The story is different in rural Minnesota, where most communities get a much larger percentage of their funding from state aid than the central cities or suburbs because their tax bases are smaller. Outstate cities still need the aid to stay afloat, said Steve Peterson, senior policy analyst at Coalition of Greater Minnesota Cities.

They have adjusted to the reductions by raising taxes and reducing services, Peterson said. "There is a lot of deferred maintenance," he said. One of the easiest things to do is put off buying a squad car or fixing a road, Peterson said.

What's next?

Some officials think the worst of the cuts may be over. In his first budget, Dayton made no cuts to any property tax relief programs, including LGA. However, LGA of about $527 million annually in Dayton's budget was later cut to $425 million during the 2011 legislative special session to balance the budget.

Recently, Dayton has said he considers LGA an important tool for keeping property taxes down and helping cities maintain their quality of life.

His plan is to revise the formula for distributing the aid to make it simpler and easier to understand. To get guidance about how to do that, Dayton this year convened mayors of Minneapolis and St. Paul and 13 smaller cities for a series of discussions about LGA.

"What we have heard from the mayors is that they have had to cut areas that they really don't want to cut," and they are putting off fixing things, said Revenue Commissioner Myron Frans.

In recommendations to the governor, the mayors called for stable, adequate aid they can count on.

Laurie Blake • 952-746-3287