State auditor: City finances melted down since 2000

The first decade of the new century was a brutal one for Minnesota's cities.

A new evaluation by the State Auditor's office shows that by nearly every measure, city finances were whipsawed between 2000 and 2009, leaving the state's 800-plus cities in far worse financial shape than they had been, ranging from the cities' income stream to the amount of money they had to spend.

The audit, released Thursday, puts meat on the bones of city officials' longstanding complaints that they have disproportionately borne the brunt of the state's ongoing budget woes, even as they have slashed city services. And the report is likely to provide fodder for this year's budget battle, which could once again increase the financial burden on cities.

In releasing the audit, State Auditor Rebecca Otto said that "further reduction in local government aids will have an impact on what revenue sources cities will have to rely on."

However, during a news conference, Otto steered clear of the political implications of the audit. "I don't want to enter into the fray of politics," she said. "That's the conversation that's going to occur between the cities, the lobbying groups and the governor."

During 2008 and 2009, corresponding with the depths of the recession, cities' revenue declined as did their spending, even as capital spending on infrastructure projects encountered what Otto called "a steep decline." Spending on everything from street maintenance to new construction has "just tanked," particularly since 2006, Otto said.

One of the report's most notable findings concerns property taxes, which have become a flashpoint of contention between city and state officials and promise to be contentious as legislators and Gov. Mark Dayton struggle to close the state's $5 billion budget gap.

Owners of homes and businesses have been howling for several years about property tax increases, which local officials have blamed on the very decreases in state aid identified by the audit. Dayton has blamed his predecessor, Gov. Tim Pawlenty, for shifting the financial burden to local units of government, repeatedly calling property taxes "the most regressive" in the state's tax code.

Between 2003 and 2004, corresponding with a large cut in local government aid, revenue from property taxes for the first time surpassed revenue from state and federal aid, the audit found. The gap has continued to grow.

"Cities have to pay their bills, right?" Otto said. "[Home] values have gone down, but property taxes have gone up."

Overall, in inflation-adjusted dollars, cities' revenues decreased by 11 percent between 2000 and 2009, while their spending dropped by 8 percent during that period. the audit concluded.

During the decade, the audit found that total spending by cities increased from $4.12 billion to $5.38 billion, but when adjusted for inflation that actually represents a decrease of 8 percent. Small cities appear to have been hardest hit, with their spending dropping by 6 percent, while cities with populations larger than 2,500 residents decreased their spending by just 2 percent.

According to the audit, cities' budgets are largely consumed by the basics: streets, highways and public safety, which, taken together, accounted for roughly half of the cities' budgets. Public safety spending was the only category that experienced a significant increase during the period.