Cuts in state aid back cities into a fiscal corner

A shrinking pipeline of state aid and tax credit reimbursement has north metro cities at the budget chopping block.

Although cuts won't be final until the end of the legislative session, cities are planning for the worst-case scenario. And cities' decisions are guided by Gov. Tim Pawlenty's budget, which cuts millions in local government aid (LGA) and withholds a piece of cities' property tax revenues.

For example, to make up for a lost $153,900, half of its LGA allotment, St. Francis implemented a hiring and purchasing freeze effective in January. Brooklyn Park used one-time fund balance transfers, staff buyouts and other ways to offset the $1.6 million loss in state aid expected this year. Brooklyn Center department managers are reviewing their budgets line by line looking for ways to reduce, shift or defer expenses to offset up to $1.4 million in LGA cuts. Columbia Heights has already made big cuts by laying off two clerks, not filling four open jobs and giving all staff, including police and firefighters and the city manager, a two-week unpaid furlough.

At stake are LGA, which supplements the budgets of revenue-poor cities, and the market value home credit (MVHC), which repays cities for state-mandated homestead tax credits. Not all cities receive LGA, but all were in line to receive the property tax reimbursement. Add in plummeting residential and commercial property values, and a state-imposed levy cap that restricts cities' ability to raise taxes beyond inflation.

"LGA has been a double-edged sword," said St. Francis city administrator Matt Hylen. "It makes budgeting exponentially more difficult when you have a moving target for revenues when you are reliant on those aids."

Hylen said the city can't sustain the cuts for long.

"That's risky if you do it too long," he said, comparing the practice to trying to keep a used car going indefinitely. "You can keep delaying those services, but at some point it will bite back."

League lobbyist Gary Carlson, who works on LGA allotment bills, said city officials call him almost daily to see what bills are being discussed and what they can expect. Carlson said that since state tax revenue forecasts were announced in March, cities have an idea of the worst-case scenario.

The league "is trying to help cities cope with what is coming," Carlson said. He said a bill was discussed in committee last week to allow cities to get bank loans for up to two years to cover the loss of LGA funds.

Carlson said the typical city has 60 to 70 percent of its budget allocated to staff wages, so jobs are at stake if worst fears are realized.

Even cities that don't get LGA will have to cover the gap in their budgets if the state does withhold the homestead credit refund. Last fall, the governor "unallotted" cities' second-half 2008 MVHC payment.

Budgetary nips and tucks

"Last year we had an F1-F2 tornado, and last year's budget was able to handle that," he said. "This year, we don't have that in the budget."

Similarly, a MVHC loss of more than $1 million has forced Coon Rapids to cut services, and reduce staff by 13 people, most of whom will not be replaced this year. The city is looking for new revenue sources.

This isn't the first time the state has failed to deliver on the homestead refund, but the hit is harder this year because of the poor economy.

Rachel Walker, policy analysis manager for the League of Minnesota Cities, called the situation "a failure in the state-local fiscal relationship."

Arneson said he's seen enough.

Some cities are plotting out their 2010 budgets, expecting lower or no allotment for LGA or MVHC. More personnel cuts are possible, and cities are reconsidering the meaning of "basic services" and tallying up the cost savings of keeping equipment another year.

"In the guise of saying we're going to hold down your property taxes, they're penalizing the taxpayer," said Hylen, of St. Francis. "But they won't know that for years."