Officials with the League of Minnesota Cities are hoping a startling new analysis of city finances will jump start a statewide discussion about how cities can continue to provide services in the face of unprecedented budget challenges.

According to the analysis, prepared by the Hubert H. Humphrey Institute at the University of Minnesota, cities of all sizes in all regions of the state will be broke by the year 2015 if current revenue and spending trends continue. The report was released late last week at the League’s annual conference for city officials.

According to the projection, cities will experience deficits equal to 35 percent of city revenues by the year 2025. Cities across the state face similar prospects, regardless of size, local tax base, or economic conditions. “All types of Minnesota cities will end up in the red if big changes aren’t made to city services, funding for those services, or both,” stated a press statement issued by the League.

To develop the projection, the Humphrey Institute relied primarily on data from the Minnesota Department of Revenue and the Office of the State Auditor. Researchers analyzed 11 years worth of historical city revenue and expenditure data, as well as state aid and property tax data. Based on those historical trends, they projected what overall city revenues and expenditures would look like through the year 2025 assuming no policy changes. A more in-depth explanation of the projection can be found at http://www.lmc.org.

League Executive Director Jim Miller said the report isn’t intended to advocate for any one solution, but to make people aware of the issues and the choices that need to be made. “We need to start having frank discussions about it, and recognize that the solution can’t be all about raising taxes or cutting services,” said Miller. In order to facilitate that discussion, the League is soliciting public ideas and comments on city services and funding through a new blog site (www.outsidetheox.org). The thoughts and ideas gathered from contributors will form the basis for policy proposals and possible legislative action. The League has also posted an informational video on the situation, which can be viewed at www.youtube.com/ outsidetheox

Neither taxes nor spending cuts alone

While many cities have turned to property increases to cover cuts in local government aid, or LGA, over the past several years, “city officials realize that can’t continue indefinitely,” Miller said. According to Miller, cities across the state have also instituted efficiencies and cut costs through layoffs and reductions in response to reduced LGA payments.

At the same time, Miller said the League is fighting the view that the problems can be fixed all on the spending side, a position aired by Gov. Tim Pawlenty last Friday in response to the League’s report.

“That’s exactly the kind of mentality we’re trying to break,” said Miller. Without some form of additional revenue, “the only alternative would be radical reductions in services, including public safety,” Miller said.

The result of this fall’s gubernatorial election could determine to a large extent which view holds sway in the state over the next four years. Republican hopeful Tom Emmer has called for cutting state spending by as much as 30 percent, a proposal that is unlikely to spare LGA.

“But even if we end up with a governor who is more amenable to tax increases, there will be another round of budget cuts, and it’s probably inevitable that LGA will be part of that equation,” said Miller. “We’re going to do our best to argue that cities have already given up a lot.”

League officials may also argue that cities need more flexibility to raise revenues in other ways if the state is going to continue to chop away at LGA. “When you go back to the whole idea of the Minnesota Miracle, it meant in return for state money, cities lost flexibility to impose local taxes. If we’re going to break one part of the agreement, we may have to look at giving cities greater flexibility to raise revenues in other ways,” said Miller.

Local sales taxes are one possibility, which Miller said could help some cities. ‘For places like Ely or Bemidji, where you have significant retail sectors and a large amount of tourism, it may help,” said Miller. But other cities, he said, don’t have the retail sector needed to generate significant sales tax revenue, and those cities will need to seek other solutions.