Minneapolis: not a ward of the state

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April 7, 2003 // UPDATED 10:33 am - April 30, 2007
By: Bob Gilbert
Bob Gilbert

Contrary to perception, the city sends more taxes to the state than it gets back in spending. State cuts mean more cash will flow out of Minneapolis.

Governor Tim Pawlenty's message to Minneapolis leaders in his 2003 budget address was simple: If you can't manage a 5 percent reduction in your total revenues without cutting police and emergency services, you should be fired.

Pawlenty was bluntly defending his proposed cuts in local government aid (LGA) -- state money given to individual cities like Minneapolis for property tax relief. Pawlenty said it's only natural that the urban core, which uses more government services, should take a bigger LGA cut.

State Auditor Pat Awada echoed the governor's sentiments in a report stating that cities receiving the most LGA are the biggest spenders and take more than their fair share of state resources.

What the Governor and State Auditor do not mention is that Minneapolis is not a drain on the state treasury -- in fact, the city sent $48 million more in taxes than it got back in state spending in 2000, according to Jeff Van Wychen, an independent analyst who worked from the most recent state figures.

State Rep. Ron Abrams -- the chair of the House Tax Committee and, like Pawlenty and Awada, a suburban Republican -- was asked if Minneapolis is a net contributor or net taker of state funds. Abrams' answer: "A net contributor."

In other words, far from being on state life-support, Minneapolis is Minnesota's fiscal benefactor. Pawlenty's proposed $21 million 2003 Minneapolis LGA cut means that the city will likely transfer even more money to the state.

Calculations

The state has figures on how much money Minneapolis receives for K-12 education and LGA; in fiscal year 2000 (July 1999 to June 2000), the state sent $320 million to the city for education and $125 million in aid to city government, parks and libraries.

Meanwhile, Minneapolis, with 8 percent of the state population, produced 12 percent of the state sales tax and 15 percent of the income tax in 2000 --$341 million and $101 million, respectively, according to the city budget office.

The state Department of Revenue tracks other tax transfers by county, not city, such as social service costs and corporate income tax. Van Wychen -- an independent tax policy analyst who has advised metropolitan governments for 19 years -- broke out Minneapolis figures using the 2001 update of Minnesota House research report "Major State Aids and Taxes: A Comparative Analysis."

Using census figures to produce a ratio of total wages paid in Minneapolis versus Hennepin County, Van Wychen calculated that Minneapolis alone generates $110 million in corporate income taxes.

And that $110 million only measures taxes on sales generated within the city's borders. That's significant because Downtown-based companies such as Target Corp. pay most of their taxes on revenue earned beyond the city's limits.

"I did not try and skew the data one way or the other. My approach may be imperfect, but it is not consciously biased one way or another," said Van Wychen.

While he believes Minneapolis is a net giver to the state, Minnetonka Rep. Abrams cautions about any specific estimates.

"I wouldn't put any stock in that without a thorough review by the Department Of Revenue and the Department of Finance," he said. "I would suspect that people who are looking for a specific result can probably manipulate the figures to have a specific result."

However, state finance officials endorse Van Wychen's methodology. Peggy Ingison, Minnesota's state budget director since 1996, who works in the Department of Finance, said, "It sounds to me like Van Wychen has done a pretty credible job of figuring the issues here. His method seems sound. It's good to find out where money is being generated, and where it is being spent."

The big picture

Although some may be surprised Minneapolis is a state creditor and not a debtor, it's not alone in the metro area.

Of every tax dollar collected by the state, roughly 80 cents is returned to communities and individuals as aid and grants. The remaining 20 cents pays for state-funded parks, highways, colleges, prisons and state government.

Tax revenues are redistributed throughout the state through a complex system of formulas based on need and other factors. Some areas receive less than their citizens pay in; other areas receive more.

Minneapolis gets back 95 cents of every dollar it gives the state. However, Hennepin, Dakota and Washington counties receive less than 60 cents back -- in other words, these largely suburban counties are the state's biggest cash cows.

Rural western and northern Minnesota counties generally receive more than they pay in.

Local government aid was invented to compensate cities and counties for small property-tax bases or high needs. Property taxes are the major way that cities pay for basic services.

LGA recipients typically have older housing stock, a declining population, or little high-value industrial or commercial properties to support their area's needs.

Regional centers such as Minneapolis also receive LGA because individuals living elsewhere frequently use city services but do not pay for them. The Minneapolis Downtown Council estimates that 162,000 individuals work Downtown everyday, and another 130,000 come each day for school, medical care, the lakes, sports, or to shop.

As Mayor R.T. Rybak says, "Minneapolis belongs to everyone."

Are LGA cuts like killing the goose that lays a surprisingly golden egg? Sam Grabarski, Downtown Coucil President and CEO, said, "In our regional economy, a weak Minneapolis would be very bad for the state. Whereas a robust Minneapolis produces much more in tax revenues for people of Minnesota than it ever gets back."

Grabarski said the Downtown Council sympathizes with Pawlenty trying to reduce a $4.2 billion projected deficit without raising taxes. But, he added, "We don't think that LGA cuts should be differentiated among cities so that there are big losers like Minneapolis. Our executive board wishes the cuts didn't have to focus on police, fire and public works. It's too much."

Bracing for $81 million in LGA reductions in the next two years, the Minneapolis City Council recently approved $16 million in 2003 cuts to police, fire and public works. City leaders said cuts to so-called "core services" were unavoidable since the three departments make up 70 percent of the city's operating budget.

Said Grabarski, "Anything that lowers the sense of safety, the caliber of street maintenance and general ambience only makes an already high vacancy rate in Downtown buildings worse. If commerce isn't good, less tax dollars are generated, which in turn foreshadows a worsening economic condition for the city and the state."

Abrams said his House committee is still trying to figure out what Minneapolis' fair share of cuts should be, since it is a net contributor and the first home for immigrants and low-income families.

The answer, he says, is not cut-and-dried.

"Should the citizens of Minneapolis [pay] for welfare costs because people living in the city use more of those dollars than people living in Albert Lea?" Abrams asked. "Should that be a cost given to the city of Minneapolis, or is this basically a societal cost? I don't know what their responsibility for a general societal cost should be."

Ingrison said she is often frustrated by what she calls the parochial politics between state constituencies. Years ago, she said, it was a rift between metro and rural Minnesota; now, between the city and suburbs.

"There seems to be some resentment about Minneapolis in the suburbs," she said. "The rhetoric is that the city does not have enough accountability for their spending and is getting a greater share of their money than other communities."

Minneapolis State Rep. Margaret Anderson Kelliher (DFL-60A) hears it all the time.

"When people at the Capitol see how much money Minneapolis gets from local government aid, they bristle and ask 'why so much?'" said Kelliher, who represents Downtown south of 7th Street. "The perception is that we are not givers, we are only takers.

"Many big urban areas around the nation take dollars from the state but don't give any back in return. We're not in that situation and to portray it like that is not fair. Minneapolis is a vital and vibrant place, and we need to keep it that way."