The Potluck

What happens when federal relief funding for Minneapolis and other cities runs out?

By: - August 29, 2022 6:01 am

The city lost $300 million in revenue in 2020 and 2021 — with hits to things like parking and sales tax revenue — and is using federal funds to make up for half of that. Photo by Tony Webster.

The city of Minneapolis will use $81 million in federal pandemic relief to balance its budget over the next two years, and hopes revenue stabilizes to avoid a fiscal cliff when the federal money ends in 2025.

Whether downtown Minneapolis office towers bounce back from pandemic-induced woes in the next two years is key to helping refill city coffers.

Minneapolis is not alone among big cities facing fiscal uncertainty after years of skyrocketing office vacancies and pandemic-related costs. 

The Brookings Institution, National League of Cities and National Association of Counties found large cities and counties budgeted 42% of the federal American Recovery Act money toward staffing and replacing lost revenue. In other words: The money kept local governments running — helping to avoid the deep cuts and economic stagnation that followed the Great Recession. 

Once the federal money runs out, however, Minneapolis and cities across the country will have to adapt to a new normal

About 55% of the 216,000 pre-pandemic downtown Minneapolis employees have returned to the office in some capacity, many working two or three days a week in the office, according to the Minneapolis Downtown Council.

The office vacancy rate is 25% citywide, and over 30% downtown, according to a recent Cushman & Wakefield report.

Office vacancies nationwide are about 18%

When vacancies go up, the value of the property goes down. And property taxes are the top contributor to the city’s general fund. Likewise, downtown is an economic engine for the city and state, accounting for about 40% of the city’s property tax revenue before the pandemic, according to the downtown council. 

The long-term nightmare: Office vacancies stay elevated, commercial property tax revenue collapses, requiring cities to raise taxes on families or cut service, which could drive residents to the suburbs. 

The Biden administration sent $350 billion to local governments to contain the pandemic, invest in infrastructure, rehire employees and replace lost revenue, but the federal largesse runs out at the end of 2024.

Minneapolis received $271 million in ARPA funds, and is using most of the money to replace lost revenue. The city lost $300 million in revenue in 2020 and 2021 — with hits to things like parking and sales tax revenue — and is using federal funds to make up for half of that.

The city used nearly $69 million in federal funds to prop up its budget this year, and Mayor Jacob Frey proposes to use another $47 million in 2023 and $34 million in 2024.

One of the Brookings study’s authors, Alan Berube, said it’s hard to know the possible long-term impact of the pandemic on city finances due to reduced downtown property values and sales tax receipts. Cities can’t put ARPA money into their rainy-day funds.

The total estimated market value of commercial and industrial property in Minneapolis dropped from $12.8 billion in 2020 to $12.1 billion in 2021. But it’s trending up again, increasing to $12.7 billion this year, approaching the pre-pandemic total, according to the city assessor’s office.

But not every area has completely rebounded — the city is still seeing the overall estimated market value decrease in downtown and uptown. The estimated downtown commercial market value dropped nearly 2% from 2021 to 2022, and uptown’s dropped 4.5%.

And the worst may not have arrived. 

City Assessor Rebecca Malmquist said when leases expire in office buildings and the owners aren’t able to fill the space, that reduces the property value.

“We truly don’t think we’ve seen the end of what this story is going to be, as a lot of those leases are five or 10 years (long),” she told the council earlier this year. “We have to look at what’s truly happening in each of the buildings across the city.”

Steve Cramer, president and CEO of the Minneapolis Downtown Council, said bringing the downtown economy back is crucial to restoring lost parking revenue and sales, entertainment and hospitality tax revenue, while stabilizing office and hotel occupancy to uphold property values.

“The stakes are really high for all of us,” he told the City Council in May.

This year’s city budget used ARP funds to help fill 52 city positions that had been cut during the pandemic, and Frey’s budget would restore another 54 positions by 2024, bringing the city back to pre-pandemic staffing levels.

Minneapolis Budget Director Amelia Cruver is confident the city is easing off the federal money “to make sure that we have that smooth landing” and don’t have to make major budget cuts or drastically increase taxes.

On the spending side, city taxpayers are enduring a wave of workers’ compensation settlements for police officers who say they have post-traumatic stress disorder: In the two years after George Floyd’s murder, the city paid more than $22.2 million in workers’ comp settlements to police officers, according to city records reviewed by the Reformer.

A city actuarial study estimated taxpayers will have to pay $111 million in legal settlements, the vast majority for officer misconduct claims in the 15 days following Floyd’s killing.

While the city hasn’t fully recovered from the pandemic, it’s coming back a little faster than forecasted, Cruver said. So far, sales tax revenue is coming in slightly better than expected, which is a good gauge of downtown’s recovery. Commercial property values have been stagnant, business license revenue is rebounding a little slower than expected, but residential property values have seen big increases.

Cruver is confident the city has managed its way through the pandemic by cutting expenses and restoring the most important spending to sustainable levels given the five-year revenue forecast.

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Deena Winter
Deena Winter

Deena Winter has covered local and state government in four states over the past three decades, with stints at the Bismarck Tribune in North Dakota, as a correspondent for the Denver Post, city hall reporter in Lincoln, Nebraska, and regional editor for Southwest News in the western Minneapolis suburbs. Before joining the staff of the Reformer in 2021 she was a contributor to the Wall Street Journal and the New York Times. She and her husband have a daughter, son, and very grand child. In her spare time, she likes to play tennis, jog, garden and attempt to check out all the best restaurants in the metro area.