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Locals Tighten Belts Far More than State Government

August 02, 2010 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Minnesota leads the nation in budget cutting. However, the budget cuts are not evenly distributed between the state and its local governments. A disproportionate share of the cuts since 2002 have occurred among Minnesota local governments, as state government has shifted its budget problems on to local governments through state aid cuts.

The following analysis will focus on "own-source revenue," which refers to all revenue collected by state and local governments, including taxes, fees, and other miscellaneous charges, but excluding transfers received from other levels of government. For local governments, "own-source revenue" excludes dollars received from the federal and state governments. For state government, "own-source revenue" excludes dollars received from the federal and local governments.*

Based on U.S. Census Bureau data, Minnesota state and local government own-source revenue has declined by 5.3 percent in real (i.e., inflation-adjusted)** dollars per capita and by 0.4 percent per $1,000 of personal income during the period from 2002 to 2008. (2008 is the most current year for which state and local government Census data is available.)

The chart below illustrates how local governments shouldered a disproportionate share of own-source revenue declines from 2002 to 2008.

From 2002, real per capita local government own-source revenue declined 10.8 percent, while state government own-source revenue fell by only 1.7 percent, thereby leaving no doubt who the biggest budget cutters in Minnesota are. Per $1,000 of personal income, local government own-source revenue fell by 6.2 percent, while state revenue increased by 3.3 percent.

Even this information does not reveal the full extent to which Minnesota local government revenues have declined. State government responded to its decline in real per capita own-source revenue by cutting the dollars that it shares with local governments, thereby compounding the budget blight of counties, cities, school districts, and townships.

In aggregate, the general revenue of all Minnesota local governments declined by just more than $600 per capita from 2002 to 2008 in constant 2008 dollars. However, only about half of this decline was in the form of the own-source revenue reduction described above; the rest of the decline was in the form of cuts in state aid ($226 per capita) and federal aid ($72 per capita).

What is especially surprising about this finding is that during this period, there was a large increase in state aid to local governments when the state assumed full funding of general education costs in 2003. However, the increase in state aid to school districts in fiscal year 2003 was more than offset by cuts in real per capita and per pupil aid to school districts and other Minnesota local governments in subsequent years.

The graph below shows the level of per capita state aid to local governments in constant 2010 dollars. Because Census Bureau data is not available for FY 2003, the data in the graph is based on the most recent "Price of Government" (POG) report. Unlike Census Bureau data, POG data is available for years beyond 2008; however, POG data for FY 2009 and 2010 are estimates.

Real per capita state aid to local governments in FY 2010 is 9.4 percent less than it was in FY 2002 and 28.3 percent less than it was in FY 2003, the first year of the state takeover of general education costs.

Governor Pawlenty has stated, "[local elected officials] need to get their head out of the clouds and stop increasing spending. This is the real world!... Perhaps they didn't understand that everyone else was living within their means, maybe now they will." The information above demonstrates the lunacy of the governor's comment. During Pawlenty's tenure as governor, local governments have been far more frugal than state government.

Vilification of local governments is not only misguided, but will do nothing to resolve the state's $6.8 billion budget deficit. In light of the nation-leading decline in own-source revenue--lead primarily by local Minnesota governments--it is time to consider a state revenue increase as part of a balanced plan to address Minnesota's fiscal mess.

*In Minnesota, revenue transfers from local to state government comprise a tiny percentage of total state government revenue. These transfers appear to consist primarily of sales taxes paid by local governments to the state.

**Inflation adjustments in this article are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for state and local governments.

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