Duluth facing $25 million budget hit as tax revenue shrinks

"We will be in a very, very, very difficult position," Larson said in an interview Thursday.

As local governments scramble to unroll emergency response plans to address the public health crisis, leaders across Minnesota and the United States have simultaneously started to reckon with their grim financial futures. Tourist-friendly Duluth is bracing for particularly big blows.

On Jan. 1, Larson was poised to lead Duluth through a year full of new investment plans, expanded services and a record number of construction projects. Now she's forced to consider cuts, delays and reductions to keep her city afloat through expected waves of tax revenue losses.

"Every single element of what we do will be under tremendous financial strain and will have to be a part of the financial solution," Larson said. The city already implemented a hiring freeze and laid off almost 50 temporary workers.

Duluth's hospitality industry suffered a big hit from the get-go. Thousands working for restaurants and hotels were some of the first to get laid off after Minnesota told its residents to stop traveling.

"I would venture to say that the structure of Duluth's economy probably means that they are very susceptible to the economic fallout," said Gary Carlson, director of intergovernmental relations for the League of Minnesota Cities.

Duluth is the only city in Minnesota with a local sales tax that feeds its general fund — a source of $14 million, according to this year's budget. That revenue stream is sure to shrink with the prolonged closure of businesses.

Uncertainty looms over other revenue sources, as well. Some Minnesota cities are worried the amount of local government aid — $30 million for Duluth — they receive from the state will be cut next year.

A handful of counties are also delaying penalties on property tax payments, which raises concerns about cash flows that local governments fear will be already strapped by expected defaults. St. Louis County is planning to broach the issue informally at a meeting Tuesday.

Larson said she's articulated to the county that such a move would mean the immediate loss of an expected $15 million, an amount she said the city does not "have the ability to absorb." Already, Duluth has dipped into its $10 million general fund reserves.

The state and federal government are giving some aid to cities to assist with their COVID-19 response, but those funds can't cover general budget shortfalls. Larson said Duluth is lobbying for assistance for local governments in the next round of relief packages — but she doesn't want to pin her hopes on that.

For 2020, Duluth's total budget is $331 million — a number that includes funds for capital projects, debt services, utilities and special revenue like the city's tourism tax.

Duluth raked in a record $12.4 million in tourism tax revenue last year. Larson said that number could drop by half in 2020.

Some of those funds, collected in the form of levies on hotels and restaurants, are earmarked for specific events and amenities, like the Duluth Entertainment Convention Center and Spirit Mountain ski area. The rest is funneled back into the tourism industry through grants to local organizations on an application basis.

"It's a liability right now because it's such a big industry. But it's a strength pretty soon," said Larson, who predicts Duluth will be one of the first destinations for families emerging from quarantine.

Katie Galioto • 612-673-4478