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Minnesota Communities Continue Bearing Brunt of State Budget Problems

August 25, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis
Last summer, Minnesota 2020 demonstrated that local governments have cut their budgets more than state government during the years of the Pawlenty administration.  Many things have changed over the past year -- specifically, the national economic crisis, passage of the federal recovery act, and a series of unilateral executive budget cuts and shifts.  However, with property taxes going up and services being cut, one thing remains constant: Minnesota's communities continue to bear the brunt of the state's budget problems.

The following analysis will examine the change in state and local government revenues during the period from calendar year (CY) 2002 / fiscal year (FY) 2003 to the current budget year, CY 2009/FY 2010, using data from the most recent "Price of Government" report from Minnesota Management & Budget; this data reflect the Governor's unilateral budget cuts announced in June.  (CY 2009/FY 2010 revenues are estimates.)  The percent change over time will be shown in real (i.e., inflation-adjusted) dollars per capita or, in the case of school districts, per pupil.  The inflation adjustment is based on the implicit price deflator for state and local government purchases.*

With the addition of federal recovery dollars, the analysis of state and local government finances has become more complicated.  State government and -- to a lesser extent -- school districts are receiving an infusion of federal dollars in FY 2009, FY 2010, and FY 2011.  Because these dollars are temporary, they do not represent a long-term improvement in the revenue situation for Minnesota's state and local governments and thus make an analysis of state and local government revenue trends over time problematic.

With one exception, the following analysis will exclude estimated federal recovery dollars from total state and local government revenue in order to remove the one-time bump in revenue.  The exception is the $500 million in federal recovery dollars that is replacing the $500 million cut in state general education aid in FY 2010 pursuant to 2009 Session Laws, chapter 96, article 1, section 21.  These dollars are included in school district revenues because they are replacing a one-time cut in state general education aid that is restored in FY 2011 under current law.

With or without federal recovery dollars, real per capita state and local government revenue has declined since 2002 (FY 2003).  However, the loss of revenue has not been evenly distributed among the levels of government.  The graph below shows the distribution of the real per capita revenue change from 2002 to 2009 (FY 2003 to FY 2010) among state government, school districts, cities, and counties.

Based on the analysis from last summer, real per capita state revenue was projected to fall by 6.8 percent from FY 2003 to FY 2009.  However, this was before the collapse of the national economy and its deleterious impact on public revenue.  Based on the most recent Price of Government report, real per capita state revenue is projected to fall by 10.6 percent from FY 2003 to FY 2010 excluding federal recovery dollars.

However, this statistic in isolation overstates the decline in revenue to fund state government services.  State government dealt with its decline in revenue largely by cutting the dollars that it shares with local governments.  If we subtract the revenue that state government shares with local governments, the remaining state government revenue actually increased 1.5 percent in real per capita dollars from FY 2003 to FY 2010 excluding federal recovery dollars.

After taking into account the cut in the revenue that the state shares with local governments, local governments have faired far worse than state government during the years of the Pawlenty administration.  While retained state government revenues are projected to increase slightly, real per pupil school district revenues are projected to fall by 2.9 percent and real per capita city and county revenues are projected to fall by 12.0 percent and 7.1 percent respectively.  (The county percentage includes an approximate adjustment to offset the decline in revenue resulting from the partial state takeover of court administration costs; without this adjustment, real per capita county revenues would have fallen by 8.3 percent.)

As noted above, this analysis excludes federal recovery dollars except for the $500 million used to replace the general education aid cut.  If we were to include all federal recovery dollars in this analysis, the gap between the growth in retained state government revenue and the decline in local government revenue would have been even greater than that indicated above.

The above information confirms a trend that has been repeatedly documented by Minnesota 2020.  Significant property tax increases have come no where near to replacing the real per capita cuts in state aid to local governments, so total real per capita and per pupil local government revenues have fallen significantly over the last seven years.

In announcing his unilateral budget cuts, including his $1.8 billion school aid shift and his $300 million unallotment of county and city revenue, Governor Pawlenty proclaimed, "They [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."

In fact, local government revenues have fallen short of what was needed to keep pace with inflation and population growth for at least seven years.  For Pawlenty to chide local governments about "living within their means" is an indication of either ignorance or duplicity.  During the tenure of the Pawlenty administration, local governments have been more frugal than state government.  It is Pawlenty and his right wing allies who need to get their heads "out of the clouds" and back into the reality of Minnesota government finances.

The fact that local governments have done more budget cutting than state government over the last seven years should not be construed as an attempt to portray state government as profligate.  The 1.5 percent growth in retained state government revenue from FY 2003 to FY 2010 translates to an average annual increase of just 0.2 percent -- hardly runaway growth.  However, what is galling to local governments -- and what must not be allowed to go uncorrected -- is the wrongful vilification of Minnesota's counties, cities, and school districts as big spenders.

For seven years, state policymakers have attempted to solve the state's budget problems by shifting those problems disproportionately to local governments through reductions in county, city, and school district revenues.  With the state facing a whopping $6.4 billion deficit in the next biennium, it is clear that this approach has not worked.  State leaders need to honestly address Minnesota ongoing revenue problem rather than merely shifting it to future taxpayers or to others levels of government.

*As noted previously by Minnesota 2020, the implicit price deflator (IPD) for state and local government purchases is the preferred measure of inflation for state and local governments.  The State Council of Economic Advisors and Governor Pawlenty's Senior Policy Advisor have stated their preference for the state and local IPD over the consumer price index (CPI) as the measure of inflation for state and local governments.

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