By Mark Fischenich
Free Press Staff Writer
— The smallest towns in Minnesota are facing the prospect of state aid cuts for the first time this year.
Previously protected from reductions in Local Government Aid, towns of less than 1,000 population are facing the same fate their bigger brothers have been dealing with for years under Gov. Tim Pawlenty’s budget proposal. The difference, small-town mayors and administrators said, is that their budgets are already bare-bones documents with few options for spending reductions.
“We just don’t have extra services to cut,” said Kelly Steele, city administrator in Madison Lake. “We just have water, sewer, streets, a police department, fire (which is volunteer), administration. ... The only extras we have: Once a year we have a curb-side spring cleanup.”
One thing many area towns have is some reserve funds, built up a bit in anticipation that their days of being protected from LGA cuts are numbered.
They also hold out hope for one more reprieve as Pawlenty and legislative leaders spar over where to make cuts. But even if they receive full funding out of the current legislative session, they don’t expect that to last into 2011 and beyond.
“We dodged the bullet for probably the last two years,” said Madison Lake Mayor Ken Reichel. “So we’ve been more fortunate than others. ... Hopefully if we stay under that 1,000-people range, they’ll keep being nice to us.”
Reichel’s optimism fades for 2011 when lawmakers will be setting the next two-year budget and will be faced with a budget shortfall projected to reach $5.8 billion — or $7 billion when inflation is factored in. Pawlenty’s proposed reductions in LGA this year are in response to a much smaller shortfall projected at $1 billion for the current state budget.
“Personally, I feel like there will be some type of cut year after year,” said Heather McCallum, city administrator for Nicollet, Courtland and Lafayette. “It’s just a matter of what the percentage will be.”
Under Pawlenty’s plan, a city’s property tax levy and Local Government Aid are added together and then 8.2 percent of that total would be deducted from scheduled LGA payments in July and December. (See accompanying chart.)
For the state’s largest cities, the impact is millions of dollars in lost revenue. For Madison Lake, it’s $24,000.
“It’s huge,” Steel said of the proposed cut. “Our annual expenditures for this year are about $525,000.”
The city could make that up by laying off a single employee. The problem is, a single employee equals the police department, half the public works department, 20 percent of the entire five-person city workforce.
“That just doesn’t work,” Steele said.
Tapping reserve funds would cover part of it for one year, but that’s not a lasting solution if the aid isn’t restored in future state budgets, she said.
Making up the lost state revenue with property tax increases in 2011 isn’t a realistic solution either, said Mayor Reichel, the owner of an automobile repair and service business. The deep recession has left too many people hurting financially to inflict a large city tax increase on them.
“I would say a third of my clientele’s been out of work or affected by it,” Reichel said of the economy. “The last two years haven’t been good for anybody.”
Although the economy is showing some signs of recovery, the news remains glum at the Capitol. The most recent economic forecast showed red ink increasing in the two-year budget cycle starting in July 2011.
If LGA is steadily reduced in coming years — or eliminated completely, as some state and local leaders now fear — the impact will range from devastating to deadly depending on the town, local officials say. That’s because the level of dependence varies greatly, as does the amount of industry and high-value housing to spread the property tax burden on.
Under a complex formula that, at least in part, attempts to identify the neediest cities with the lowest property wealth, different towns receive substantially more LGA than others and are more dependent on it. Lafayette and Courtland, which has higher-valued homes as a bedroom community of New Ulm, are an example of the difference.
In 2010, Courtland is slated to receive 36 percent of its general fund revenue from LGA. Lafayette gets 56 percent from the state.
Staff would need to be cut if LGA is reduced year after year, McCallum said. In Lafayette, with one full-time employee, that would be a tricky task.
“Basically, our maintenance department is gone,” she said of the prospect.
Courtland operates entirely with part-timers.
Street maintenance would probably be put off in both places, McCallum predicted. Snowplowing and other services would be accomplished more slowly as towns shared workers or equipment. Water quality might deteriorate if Lafayette’s aged equipment didn’t have a full-time worker keeping it operating.
At the same time, property taxes would need to rise substantially to make up a portion of the lost state aid, McCallum said. And in a place like Lafayette with its elderly residents, many on fixed incomes, large tax increases would hit with extra force. At least some people would leave.
“It would be very difficult for Lafayette to exist,” she said. “... It’s not a luxury for small cities to have LGA. It really is for the basics.”
