Hard Times at City Hall

The State of the City? We're Broke.

Two weeks ago Gov. Tim Pawlenty fired the first shot in what promises to be a protracted battle between the state ofMinnesota and its local governments. Announcing his plans for erasing a huge state budget deficit, Pawlenty proposed to cut funding for Local Government Aid--the state assistance that goes to cities for general operations--by 22 percent over the next two years. Assuming the tough fiscal language of a CEO, the governor suggested that any city leader who couldn't find ways to deal with the cuts should be fired.

Minneapolis mayor R.T. Rybak immediately cried foul, as did a host of city council members. Nearly half of Minneapolis's $260 million general fund is dependent on lga, and with the projected cuts, the city would stand to lose $81 million over the next two years. Since the legislative session began in January, a large delegation from the city has been pleading with lawmakers at the capitol to spare the funding.

It is one more tale of fiscal woe for Minneapolis, which is seeing its worst financial crisis in memory. But the lga cuts may provide one consolation for local officials: They will offer up a politically convenient scapegoat for the city's looming financial problems. Even before the Pawlenty budget, Minneapolis was mismanaging on its own quite nicely. It has spent lavishly on development projects in the past decade, most recently on such high-profile development deals as the downtown Target and the new Block E complex across from City Center. The city has been juggling a growing debt load for years, and now the crisis is becoming manifest.

The magnitude of the problem can scarcely be overstated. Most at the capitol had seen Pawlenty's proposed LGA cuts as a foregone conclusion. To gird themselves, Minneapolis leaders recently adopted the city's first-ever five-year financial plan, designed to address what was projected as a $55 million shortfall over the next five years. But those numbers assume that the LGA money--some $89 million last year--would continue to flow unabated. And no matter how deep the cuts prove in the end, that will certainly not be the case.

But cuts in state aid are just the beginning of the problem. Minneapolis's expenditures have exceeded its revenues every year since 1990. Several departmental funds have been operating at a loss for nearly a decade. And the city's debt service--the money required to make annual payments, with interest, on borrowed money--will be $122 million in 2003, a sum that is almost 75 percent of the city's projected revenue from property taxes.

The problem is compounded by another state fiat: In 2001, legislators cut taxes for businesses, historically a strong source of revenue for the city, even as Minneapolis office vacancies kept on climbing. (Meanwhile, city leaders have vowed to keep residential property tax increases capped at eight percent through 2010.) And health care and pension costs for employees are draining municipal coffers like never before.

So austerity and "streamlining" are the orders of the day in city government, from the capping of employee salaries to the combining of departments and the reduction of police and fire department budgets. "Everything's on the table," says Barb Johnson, chair of the city council's Ways and Means/Budget Committee. "There's no way people can hold on to things the way they used to be. The days of kingdoms and not sharing and not working together are done. People have to realize that some of the things that they hold dear about Minneapolis are not going to be around anymore."

Others are less sanguine. Some simply say that Minneapolis, for all intents and purposes, is broke.

 

In 1970 the city of Minneapolis was solvent. Indeed, the revenues for the year, $61.3 million, were actually a little higher than predicted. The city earned more that $1.7 million in interest on investments alone--an all-time high, according to the city treasurer's note in the annual budget report. And debt service was only $35,000, leaving the city with ample cash flow to help cushion the effects of the mid-'70s recession.

By contrast, the city's 2003 budget, with revenues forecast at $1.22 billion--20 times what they were in 1970--offers at best a shaky plan for breaking even. By the end of 2001, the city's total debt had reached $1.5 billion; the $122 million in debt service due to be paid this year is 10 percent of the city's overall budget.

Minneapolis is hardly the same aging mill town it was in the Nixon era. The Metrodome wasn't here in 1970. Neither was the IDS tower, City Center, the Target Center, or the Convention Center. Or Orchestra Hall. That was built in 1973 with a 30-year bond for $9.2 million. It was one of the first significant bonds the city used for a marquee downtown development; in the coming years, taking on bond debt to develop and redevelop the city became routine.

Not all bonding projects have been as successful as Orchestra Hall, however. Minneapolis built its original skyway system with "self-supported" bonds--meaning that tax revenue from the vendors who occupied the skyways was supposed to pay off the borrowed money--but the city ended up picking up the tab. Through the years a number of high-profile redevelopment projects have run into trouble, but there's no question that the bulk of Minneapolis's present fiscal troubles are rooted in the relatively recent past.

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