Cities lean heavily on property taxes to keep functioning

It will come as no surprise to Minnesota homeowners that their cities have increasingly relied on property taxes to operate in recent years.

But a new report from the state auditor's office quantifies just how dramatically that reliance has grown -- and has sobering implications at a time when the state faces a massive budget shortfall and home prices statewide are cratering.

Between 1998 and 2007, the revenue received from property taxes in the state's 855 cities increased by 98 percent, according to the annual Minnesota City Finances Report. At the same time, the cities' revenue from the state and federal government grew by only 14 percent.

Looked at another way, while cities relied on property taxes for 23 percent of their revenue in 1998, that grew to 32 percent a decade later. During the same period, revenue from state and federal government shrank from 33 percent of revenue to 26 percent.

And that financial shift occurred long before the current crises in the budget and home prices, prompting Auditor Rebecca Otto to sound the alarm about the trend.

"This was happening before everything went south and it spells real trouble," Otto said after the report was released Thursday. "You can only put so much pressure on property taxes before it causes problems."

On the same day that Gov. Tim Pawlenty delivered a State of the State message calling for more spending cuts, Otto said she wanted "lawmakers to know we have issues in Minnesota they have to be very concerned about."

City officials across the state are equally concerned, said League of Minnesota Cities analyst Rachel Walker. "With foreclosures and [home] vacancies shrinking the property tax base, the property tax rate has to eventually go up if a city wants to maintain its services," she said.

And the situation is more dire than in 2003, the last time the state faced a massive budget deficit "because the property tax base was very healthy then," Walker said. "It's very, very different now."

Cities already have lost $66 million in state aid, a significant cut in their budgets, as part of the attempt to close the state's current budget deficit. They're bracing for more as state officials attack a far bigger shortfall in the next two-year budget cycle, she said.

The auditor's report also shows that cities weren't unrestrained in their spending during the decade that ended in 2007. Total spending by the cities totaled $5.32 billion that year, a decrease of 4 percent from 1998 when adjusted for inflation. Total city revenue also shrank, in constant dollars, during that period.

The report found that streets, highways and public safety account for the lion's share of municipal spending, accounting for nearly half of the cities' budgets.

Bob von Sternberg • 612-673-7184