State could take back $8.3 million from Minneapolis this month

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November 19, 2002 // UPDATED 1:33 pm - April 30, 2007
By: Kevin Featherly
Kevin Featherly

Although the city was promised the money, budget woes mean the state can renege

Those who manage city finances are waiting with apprehension for Wednesday, Dec. 4 to arrive. It could be a very bad day.

That's the date the state Finance Department is expected to issue its latest 2003 revenue forecasts -- and if they turn out to be as gloomy as many fear, it could mean big money the state budgeted for cities could be stripped from municipal coffers.

Based on estimates issued by the League of Minnesota Cities, Minneapolis Finance Director Patrick Born said the city could take an $8.3 million hit to its anticipated Local Government Aids (LGA) payment in December. To get some sense of what $8.3 million buys, Phase II of the Neighborhood Revitalization Program costs about $15 million a year; the city attorney's office and city clerk's office combined cost about $7.6 million.

The money that would be withdrawn already is allocated and already budgeted.

For now, even an $8.3 million hit probably would not mean budget cuts, Born said; the city would draw down its reserves. But doing so could eventually make borrowing to pay off millions in city debt more expensive.

Why? Bonding agencies rate the city's ability to pay its bills; the lower the rating the higher the interest rate. Bond houses require the city to keep 10 percent of its general fund in reserve; the anticipated LGA cuts would leave just $5 million above that -- heading into a legislative session where lawmakers will almost certainly cut LGA more deeply to close an expected $3 billion-plus deficit.

Paul Moore, a spokesman in the governor's office, said any talk of LGA cuts this month is speculative. "It sounds like a rumor," Moore said. "I don't know where it comes from, because [Ventura] hasn't made that call."

But Gary Carlson, director of intergovernmental relations with the League of Minnesota Cities, said his source, "a principal within Ventura's office," tells a different story.

"We're still hearing [unallotment] sounds likely," he said. "I would say it's a strong likelihood."

State taketh away?

How could the state take away what it has already delivered? Easy.

Minnesota law forces the state to balance its budget each biennium; the current one ends next June 30. When the Legislature is not in session, the governor can exercise broad discretionary powers to "unallot" money already spent in order to keep the budget balanced throughout the year.

The basic problem is that forecasts the last Legislature used to set its state budget through June 2003 have fallen short. Thus, the state may have appropriated money based on an overly optimistic set of short-term projections at a time when an expected economic upturn has not materialized.

"If the short-term deficit is announced in December," Carlson said, "that would be a basis for the governor exercising his power."

LGA, a program to reduce cities' reliance on local property taxes, represents 40 percent of the city's general fund revenue, Born said.

Tammy Omdal, the city's director of financial planning, noted that the city's overall budget is $1.2 billion, and that an $8.3 million hit might seem like small potatoes. But, she said, it's not.

Most of the city's budget -- 75 percent -- is restricted to particular forms of spending, Omdal said. The convention center's $19.8 million 2002 budget can only be spent there, for instance. Pensions are also separate, as are the Park and Library boards, the Minneapolis Community Development Agency (MCDA) and other spending programs.

But the general fund is the lifeblood of some of the city's most important services, notably the Police Department, which received $93 million from the general fund in 2002. The Fire Department cost $41.6 million. The Health and Family Support social service spent $13.2 million. Street and bridge maintenance money also comes largely from the general fund, she said.

Reserves hit first

The city's reserves would dwindle from $38 million to $31 million, just above the $26 million mandatory minimum, Born said.

"It means that we [would] have fewer reserves to deal with other uncertainties," Born said. "It reduces our flexibility to deal with future revenue cuts."

In Minneapolis, the cuts would be spread across the city, library and parks budgets, Born said. The city would face $6.6 million in direct cuts; the Library Board would face a $660,000 cut, which would force it to tap its own reserves, reducing them by 22 percent. The Park Board, meanwhile, would lose $1 million, resulting in a 25 percent reserve cut.

City Councilmember Scott Benson (11th Ward) said that the city already has agreed to raise citywide property tax levies by 8 percent this year -- counting the higher LGA revenues -- it is unlikely to raise taxes to make up for unallotment.

Benson, chair of the council's Intergovernmental Relations Committee, which deals with the legislature, calls the LGA cuts "very close, I think, to the disaster end of the spectrum" because the city will probably have to cut programs when bigger LGA cuts come next year. "Even if it's a million or two [million dollars] that's not covered by reserves, that's a disaster for us," he said.

Councilmember Barret Lane (13th Ward), a council budget hawk, said declaring a disaster might be premature.

He said the scale of the problem would depend on the actual extent of LGA cuts that are made, if any. "No matter what it's going to be, it's going to be some type of problem," Lane said. "I don't see any reason to panic."

Future shock

Regardless who is right, Born said he already foresees another nightmare scenario.

The Dec. 4 state forecast won't deal only with the current biennium's allotments, but those for the next biennium running from July 2003 to June 2005.

Carlson said there are indications that the commonly anticipated state budget deficit for the next biennium -- $3.2 billion -- may be significantly underestimated.

If it is, Born said, it is easy to imagine future cuts to LGA so deep that city reserves can't compensate.

If the city falls below its mandatory minimum reserves, Omdal said, policymakers would be forced to swing budget axes hard to make up the difference. A $10 million cut in state aids next year, for instance, would probably force cuts to basic services.

"It would be capital projects such as streets, roads and bridges," she said. "Or public safety, or some of the smaller departments that are funded out of the general funds such as health, civil rights, including finance and human resources. We'd have to reduce our sizes accordingly."

Born said that scenario is likely.

"If the Legislature reduces local government aids to balance the budget for the next biennium," he said, "we will certainly reduce spending as a result, because LGA is such a large revenue source for us."