Local government cash crunch coming as expenses up, tax receipts down

Woodbury and other cities that rely on building permit money will likely see declines in revenue. Photo by Hannah Black.

Minnesota cities and counties face massive uncertainty as they try to prepare their budgets, facing unknown new costs to deal with COVID-19 and the prospect of a collapse in revenue. 

Local governments have faced a slew of unexpected expenses, even as they fear residents will be late on their property tax bills — if they can pay at all. 

The grim forecast highlights the stakes of debates at the State Capitol and in Washington about aid to cities and counties, which are on the front lines of dealing with the health and economic consequences of COVID-19. 

Money for local governments is the quickest way to benefit the greatest number of people, said State Auditor Julie Blaha, whose office audits local governments. 

“When the money is the lowest, the need for services is the highest,” Blaha said. “When you’ve got the least to work with, you’ve got the most to do.”

For now, cities and counties are making do. They are buying personal protective equipment and paying overtime to public safety workers. The sudden transition to working from home meant providing equipment and IT infrastructure for city and county workers. Some have incurred costs because of more frequent communications with the public, from updates on health and safety guidelines to what services are and aren’t available.

Leaders hope these expenses will be reimbursed, at least in part, by the $2.2 billion Minnesota received from the federal CARES Act. Hennepin County was directly allocated $220 million and Ramsey County $96 million, leaving the state to figure out how to spend $1.87 billion. About $667 million of that could go to local governments, said Daniel Lightfoot, a lobbyist for the League of Minnesota Cities. 

The state Legislature is trying to come up with a plan to fairly distribute the money to municipalities. A bill from Sen. Julie Rosen, R-23, proposes distribution of the money on a per capita basis, though it has received pushback from Hennepin and Ramsey County commissioners and some DFL members, who argue the two urban counties should receive a greater share of the money because they’ve been harder hit by the pandemic.

Lost tax revenue is the other side of the ledger, and the federal government is not yet coming to the rescue.  

Although local leaders appreciate the money from the federal government, their bigger concern is lost revenue, Blaha said. 

Municipalities aren’t taking in nearly as much money as usual from local taxes, parking fees and other sources because the stay-at-home order has reduced economic activity like eating out and going to events.

Minneapolis, for example, expects to be anywhere from $100 million to $200 million short of its 2020 budget, spokeswoman Sarah McKenzie said in an email. The biggest losses: local sales and entertainment taxes ($60-$65 million); parking fees ($25-$30 million); convention center sales ($10-$15 million); and, utility charges ($10-$15 million).

Municipalities are also anticipating a dramatic drop in property tax revenue. Some have instituted a grace period for upcoming payments, due on May 15 for many residents, which means revenue would be delayed. A recession and prolonged unemployment could mean more people not paying their property taxes – and less money for local governments.

“We are most concerned with how many of our taxpayers may not be able to pay their taxes at all in 2020,” said St. Louis County auditor Nancy Nilsen in an email.

If just 5% did not pay this year, the county would lose $7.3 million in revenue, Nilsen said. They expect to lose another $6 million from other revenue streams if current pandemic-related economic conditions continue through the end of 2020, she said. All told, that’s 3% of the county’s budget. 

In Worthington, the site of a massive COVID-19 outbreak at a JBS pork packing plant, pandemic-related costs so far have been “nominal,” said Steve Robinson, city administrator.  

But the future is potentially dark, especially if people can’t pay property taxes and state government cuts back on local aid. 

“Our revenue almost all comes from (Local Government Aid) and property taxes,” Robinson said.

Many city leaders are asking if they can still count on a piece of the $560 million promised to them by the state in the form of the state program known as Local Government Aid, said Bradley Peterson, executive director of Coalition of Greater Minnesota Cities. The aid money, paid out in July and December, can make up as much as half a city’s annual budget, Peterson said.

Robinson said Worthington is “throttling down” spending until they know more, including cutting the number of seasonal employees. He said the city hasn’t reduced any of its services yet, but there is some concern about filling open positions. This city has three openings for patrol officers on their police force of 24.

Anoka County’s sales tax, which helps pay for Northstar, is declining. Photo by Hannah Black.

Anoka County Administrator Rhonda Sivarajah said the county’s sales tax, which pays for the Northstar Commuter Rail Line’s operating costs and other transportation projects, is declining. Sivarajah said the county has already received word that a Met Council grant it was set to receive is expected to be cut from $1.5 million to $750,000.

The county is reconsidering its budget, especially upcoming capital projects.

“We are looking at every single one of them and evaluating whether we should move forward,” Sivarajah said.

In growing cities, building and construction permit revenues are expected to fall, if they haven’t already. Growth in suburbs like Maple Grove, Plymouth and Woodbury has “substantially decreased” as a result of the pandemic, Lightfoot said. 

Tourism hubs like Bloomington and Duluth — where large parts of the annual budget depend on a lodging tax or local sales tax — will likely see a considerable drop in revenue because of the pandemic, he said.

Counties are often responsible for human services programs like food and housing assistance – resources that are being stretched further during the pandemic. Olmsted County has a partnership with Rochester and local nonprofits to shelter people experiencing homelessness at the Mayo Civic Center from 8 a.m. to 8 p.m. daily. 

Some counties are paying for hotel rooms to house certain high risk people experiencing homelessness. In Olmsted County, it’s often for people who need protection because of domestic violence or who tested positive for COVID-19 and need a more isolated place to stay, county administrator Heidi Welsch said.

While these kinds of costs — unplanned and pandemic-related — could potentially be reimbursed by CARES Act funds, it’s still unclear how much local governments will receive.

Welsch said she doesn’t have good numbers yet on how much revenue the county could lose because of the pandemic, but she said she is worried about unfunded mandates from the state.

“When the state runs short, they often pass the buck to counties,” she said. “We are a little afraid that we will continue to be mandated to run program XYZ but not have funds.”