Minnesota 2020 has repeatedly demonstrated that cuts in state aid to local governments have compelled these local units to increase property taxes as they are cutting budgets.  Since 2002, county, city, and school district property taxes have soared at the same time that real per capita and per pupil school revenues have fallen.

Townships have not been immune to state aid cuts over this period either.  In 2010, the township share of the “market value homestead credit” was cut by approximately $5 million statewide.  The cut was imposed by reducing the township’s credit by 3.66% of their certified levy, subject to various caps.  These cuts were initially imposed by the Governor in his July 2009 unallotment and subsequently incorporated into House File 1671 (chapter 215), which became law in April.

The one-year cut in township budgets was bad enough.  To make matters worse, the same amount that was cut in 2010 will continue to be cut in future years.  For example, the 2010 market value homestead credit cut for White Bear Township—the largest township in the state—was $97,000.  Each year in perpetuity (until the law is changed), White Bear Township will have its market value credit reduced $97,000.

The market value homestead credit cuts undermine accountability in two ways.  First, it will allow the state to claim credit for property tax relief to homeowners that it is not actually giving.  For example, the property tax statements of homeowners in White Bear Township for 2010 reflect aggregate state paid property tax relief of $105,000.  In fact, the total amount of state paid relief actually received by the Township will be only $8,000. The property tax of White Bear Township homeowners will not increase as a result of the credit cut, but White Bear Township will be left with a $97,000 hole in its budget.

Second, the cut will compel townships to levy more than they actually need in anticipation of the credit reduction.  As with all credits, the amount of the market value homestead credit is actually built into a jurisdiction’s property tax levy. The problem for the foreseeable future is that townships will not receive the full amount of the credit.  For taxes payable in 2011 and thereafter, townships will have to increase their levies by the amount of the market value homestead credit cut in order to obtain the full amount they actually need.

For example, assume that the amount of revenue needed by White Bear Township for 2011 is $2,565,000 (the amount of the Township’s certified levy in 2010).  In order to get $2,565,000, the Township will have to levy $2,662,000—$97,000 more than the Township actually needs—because the township will not actually receive $2,662,000 because of its $97,000 credit reduction.

Oh, what a tangled web we weave.  Townships will have to certify a levy that is greater than they actually need in order to generate what they do need.  Residents will see their property taxes go up—not knowing that all or some of that increase is not going to pay for increased spending, but to make up for a cut in state paid property tax relief.  Fiscal transparency and accountability is thus undermined.

Cuts in aids and credits to local governments are the state’s way to avoid the need for a state tax increase by shifting its budget problems on to Minnesota local governments and property taxpayers.  Expect more of this type of policy shenanigans until the state puts its fiscal house in order.

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There is probably not much that Minnesota 2020 and right wing gubernatorial aspirant Tom Emmer agree on.  However, there is at least one point of accord.  Aid cuts contribute to property tax increases.

As reported by MPR, fellow right winger and gubernatorial candidate Rep. Marty Seifert recently attacked Emmer for voting for a 16% property tax increase while he was a city council member.  Emmer defended himself by noting that the property tax increase that he voted for in 2003 was necessary to replace state aid cuts.  According to Emmer, “I voted to fill the hole [caused by the aid cut].  I didn’t do any new spending.”

Rep. Emmer is making the same point that Minnesota 2020 has been making for over two years.  On an aggregate statewide basis, property tax increases since 2002 are not due to increased local government spending; in fact, real per capita revenue of Minnesota counties and cities and real per pupil revenue of school districts has declined.  Property tax increases since 2002 have been necessary to fill a portion of the hole in local government budgets caused by state aid cuts.

Conservative Tom Emmer and progressive Minnesota 2020 are on the same page on this one.  The aid cuts made necessary as a result of the state’s adherence to a “no new tax” doctrine have lead to large cuts in state aid to local governments, which in turn has lead to property tax increases.  As the result of state lawmakers’ adherence to the “no new tax” pledge, the state’s budget problems have been shifted on to local governments and local property taxpayers.

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The budget compromise passed by the Minnesota House and Senate made further cuts into the revenues of Minnesota counties and cities, but not nearly so deep as the cuts proposed by the Governor.  While local governments are relieved that they avoided the draconian reductions proposed by Gov. Pawlenty, they are not out of the woods yet.

For aids payable in 2010, which corresponds to state fiscal year (FY) 2011, the House-Senate compromise accepted the position of the House, which was not far from the Senate position.  The Governor proposed reducing county and city aids and credits by $445 million in 2010—which amounts to over a third of all general purpose aids and credits that these jurisdictions receive.  The compromise House cuts for 2010 were also extremely deep—$300 million—but considerably less than Pawlenty’s cuts.  County and city aid and credit amounts under the 2010 House proposal—which turned out to be the final compromise—were shown in a Hindsight post from March 23.

The 2011 (FY 2012) cuts under the Governor’s proposal and the final conference committee compromise for counties and cities are shown in the tables below.  The Governor’s proposal would have truly gutted County Program Aid (CPA), cutting it by $174 million or 72 percent.  The Governor would have cut city Local Government Aid by $220 million or 39.5 percent.  In recognition of the fact that counties and cities have already borne more than their share of the pain resulting from past state budget deficits, the cuts to CPA ($44 million) and LGA ($31 million) under the compromise were small in comparison to the Governor’s cuts.

CPA 2011 Conf Comm

Conf Comm LGA 2011

Under the compromise, cities will also be subject to a $25 million cut in their market value credit (MVC) payment in 2011.  The amount of the 2011 MVC cut for each city is listed in the city table above.  (The Governor would have cut city MVC by $32 million.)  Counties will not be subject to an MVC cut in 2011 under the compromise.

It is believed that the Governor will sign the budget compromise that was passed by the House and Senate yesterday, although this is not 100 percent certain.  However, even if the Governor signs the compromise, local governments are not out of the woods.  For example:

• Counties and cities will have to cut $300 million from their budgets during the 2010 budget year.  The difficulty of making these cuts will be compounded by the fact that counties and cities are already a quarter of the way into their budget year.
• Counties could be subject to additional budget hits through the health & human services budget, which the legislature has yet to approve.
• On top of dealing with payment delays and funding shifts, schools districts could potentially be cut in the state’s K-12 education budget.
• A significant state budget deficit remains in both the current FY 2010-11 biennium and the upcoming FY 2012-13 biennium.  This could necessitate even deeper cuts in local government revenue.

The reprieve that counties and cities received from the draconian cuts proposed by the Governor is temporary.  Until the state addresses its structural deficit problem through a balanced approach that involves both spending reductions and revenue increases, local governments and property taxpayers will not be safe from perennial budget cuts.

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The Governor, House, and Senate have laid their cards on the table regarding cuts to 2010 aids and credits.  The House and Senate are proposing to cut a combined total of about $300 million (31%) from county and city general purpose aids and credits.  These cuts are deep by any standard, except in comparison to the cuts proposed by the Governor.  The Governor’s budget would chop a whopping $445 million (45%).

The plans proposed by the Governor, House, and Senate all adopt the 2010 aid and credit unallotments proposed by the Governor last July.  The Governor makes huge additional cuts on top of the unallotments, while the House and Senate make relatively modest cuts.  The tables below show the total 2010 general purpose aid and credit cuts—including unallotments—for all Minnesota counties and cities being proposed by the Governor, House, and Senate.  (City aid and credit cuts are the same under both the House and Senate plans.)

Find county-by-county details on 2010 County Program Aid (CPA) cuts below.
2010 CPA cuts – MN2020

And more details on 2010 Local Government Aid (LGA) cuts for specific Minnesota cities below.
2010 LGA cuts – MN2020

The total cut in 2010 county aids and credits is $192 million (53.1%) under the Governor’s budget, $119 million (33.1%) under the House budget, and $120 million (33.3%) under the Senate budget.  The 2010 cuts for cities are $253 million (40.9%) under the Governor’s budget and $180 million (29.3%) under the House and Senate budgets.  Counties will also be affected by budget cuts in other areas, such as health and human services, corrections, and payments in lieu of taxes for DNR-owned state land; the impact of these additional cuts is not shown in the tables.

The percent cut in 2010 aids and credits vary significantly from jurisdiction to jurisdiction.  For example, the City of Afton will lose 100% of its 2010 aids and credits under the Governor’s budget, while Milaca will lose “only” 31.5% of its aids and credits.  However, because of previous cuts and due to the fact that Afton is a relatively high property wealth community, it was receiving only $25,465 in total 2010 aids and credits.  Milaca, which has about the same population as Afton, will lose $231,351 in 2010—about nine times more than Afton.  When comparing the aid cuts in different communities, both the percent loss and the dollar loss should be considered.

The 2010 aid and credit cuts will be particularly hard for counties and cities to deal with, given that they are already nearly a quarter of the way through their budget year and given that the total real per capita revenue of both levels of government has already dropped significantly since 2002.  Furthermore, the option of increasing 2010 property taxes to make up for the aid loss is off the table, since levies for 2010 have already been set.

Budget cuts are inevitable given the massive state budget deficit and the Governor’s refusal to consider a revenue increase to deal with even a portion of the problem.  However, given that local governments have already cut their budgets more than state government, there is no need to inflict more pain than necessary on counties and cities.  The House and Senate aid and credit cuts—as steep as they are—are far more fair than the draconian cuts proposed by the Governor.

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In attempt to rationalize the slashing of state aid to Minnesota cities, the so-called “Freedom Foundation” has issued a report designed to discredit the city Local Government Aid (LGA) program.  The Foundation’s analysis is a mixture of distortions, selective presentation, and outright fallacies.

The errors commence in the first paragraph of the report.  The Foundation refers to LGA as “a uniquely Minnesota form of direct aid paid to local units of government.”  In fact, several other states have programs for directing general purpose aid to cities.  Minnesota’s program is unique only insofar as it attempts to rigorously measure each city’s need for state-funded property tax relief.

The Foundation presents an array of confused and erroneous statements regarding LGA growth and cuts.  For example:

• The report asserts that no city lost “more than 5.25% of their LGA-derived revenues” as a result of the 2003 LGA cut.  In fact, 624 of Minnesota’s 855 cities lost over 10% and 87 cities lost 100 percent of their “LGA-derived revenue” in 2003.  Most of the cities that lost all of their LGA received little LGA to begin with.

• The report claims that from 1999 to 2001 LGA increased by $140 million.  In fact, city LGA grew by less than one-quarter of this amount.  Furthermore, the LGA growth that did occur from 1999 to 2001 was insufficient to keep pace with inflation and population growth.

• The report further asserts that LGA “increased more than $200 million, or 52.8%” from 1999 to 2003.  This statement is also false because it does not include the impact of the aid cuts enacted in 2003.  If we ignore the 2003 aid cuts, LGA would have grown by over $200 million.  However, the Foundation neglects to mention that between 1999 and 2003 cities lost $200 million in homestead credit aid; the LGA increase that occurred during this period was designed to replace the loss of homestead credit aid.  After the 2003 aid cuts, total real (i.e., inflation-adjusted) per capita state aids and credits to cities were 25% less than in 1999.

(more…)

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In their weekly e-mail to the gullible, the Taxpayers’ League of Minnesota indulges in a nasty rant aimed at Saint Paul Mayor Chris Coleman.  According to the TLM, “tax-and-spend Coleman” is offering a “bloated budget proposal” for 2010.  The only example of “bloated” spending cited in the e-mail is Coleman’s plan to hire 34 new police officers.

The “revenue base,” which refers to the sum of city property taxes plus state aid, is a widely accepted way of measuring the size of a city’s budget.  The real (i.e., inflation-adjusted) per capita revenue base of the City of Saint Paul in 2009 is over 10 percent smaller than in 2003, the last year under a city budget set by the other Coleman – Mayor Norm Coleman.  To date, the average annual real per capita revenue base under the tenure of Mayor Chris Coleman is less than under his two predecessors, Mayors Norm Coleman and Randy Kelly.

It is also worth noting that the real per capita revenue base of the City of Saint Paul has dropped more rapidly than state government revenue since Tim Pawlenty became governor.

Based on these facts, the TLM should be offering Mayor Chris Coleman some sort of “taxpayer watchdog” award.  In the absence of this, a simple retraction of their recent incoherent diatribe might suffice.

The TLM is correct in noting that Mayor Coleman is proposing to increase property taxes in 2010.  What the TLM fails to mention is that 2010 is the first opportunity that the City of Saint Paul will have to respond to $22 million in aid reductions imposed by Governor Pawlenty over the last nine months.

The job of the TLM is easy; all they need to do is whine about tax increases without taking into account the extenuating circumstances that make tax increases necessary.

City officials, on the other hand, need to be responsible adults.  They need to keep cops on the street, libraries open, streets plowed, and drinking water safe at the same time that they are dealing with cuts in city revenue imposed by a governor who has no reluctance to shift the state’s budget problems on to local governments so he won’t have to increase state taxes.

In light of these circumstances, city officials need to be open to the possibility of increasing property taxes.  The policies supported by Pawlenty and the Taxpayers’ League leave them little alternative.

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