Weather Forecast


'Biggest crisis' will affect local government aid

ST. PAUL - Minnesota's local governments receive 30 percent of their revenue from the state, so when the state budget is sick, local governments sniffle.

Now, with a massive state budget deficit, the affliction is much worse than a cold. Many say legislators must resort to major surgery to reduce local government funding flowing from the state.

With a budget deficit that could top $6 billion, there is no doubt cities, counties and townships will lose state money. But at this point, no one knows if the surgery will involve a scalpel or a chain saw.

"This at least feels like the biggest crisis we've ever been in," said Tim Flaherty of the Coalition of Greater Minnesota Cities, who has been involved in government budgets since the 1980s.

How to deal with local aids will be a major issue facing the 2009 Legislature when it convenes at noon Jan. 6.

With a tanking economy, state taxes and fees are falling. They now are predicted to be $4.85 billion short of planned spending, and most experts say that deficit will grow to more than $6 billion in the next few months.

Since even the biggest tax fan does not think raising taxes will solve the problem, the state is faced with making massive cuts. Some of those cuts will be in money cities, townships and counties receive. Property tax increases by local governments likely will accompany those state cuts.

"I have come to the concession that there will be property tax increases when we cut aids," said Rep. Paul Marquart, DFL-Dilworth, who as House property tax chairman will be a key figure on how local governments are affected by the state budget problem.

Senate Taxes Chairman Tom Bakk, DFL-Cook, said that allowing local governments to raise property taxes is a possibility. "You can pick up some pretty big money there, but there is pretty big impact back in communities."

Minneapolis, St. Paul and rural communities rely most heavily on state payments. In some cases, state money is half of cities' budgets. Many Twin Cities' suburbs, with growing legislative influence, get little state help.

Payments to local governments top $2 billion in the two-year state budget, which in the cycle that ends June 30 spends about $34 billion.

The first solid indication of how big a hit local governments might take to help balance the state budget comes by Jan. 27, Gov. Tim Pawlenty's deadline for releasing his two-year budget proposal. There is little doubt that state aid will be high on his hit list.

While plugging a $426 million hole in the current budget, Pawlenty used $110 million that had been destined for cities and counties. And his revenue commissioner, whose department handles local government payments, said local aids are not the Republican governor's favorite.

Commissioner Warn Einess said Pawlenty tends to look at property tax refund payments, which go directly to taxpayers, as his top property tax priority. Such direct payments to taxpayers who need it most are preferred, he added.

"That has always been the most efficient way of keeping people's property taxes down," Einess said.

"Local government aid and county aid are further down the pecking order," he added.

Einess said there is no compelling proof that local aids keep property taxes low.

Pawlenty has yet to decide just what to do about local aides, Einess said. "We have run a number of different scenarios."

Rural lawmakers, especially, are worried about what scenario emerges.

Since suburban cities get little state aid, a cut in aid payments most hurts rural areas and the state's two largest cities.

Davis works for Forum Commmunications Co., which owns the Daily Globe

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.