Minnesota budget forecast raises concerns from East Grand Forks, MN, officials

A new Minnesota economic forecast shows the state could face a $5.4 billion deficit in its next two-year budget cycle starting in mid-2011, which could mean further state funding cuts to Polk County and East Grand Forks.

City Administrator Scott Huizenga said state officials were expecting bad news from the economic forecast, but not to this extent. “We knew it wasn’t looking good, but this is much higher than anyone would have foreseen just a couple months ago,” he said.

For most of the year, a deficit of about $500 million was predicted in the current biennium, which started July 1. But the forecast says the state will face a $1.2 billion deficit through mid-2011.

The $5.4 billion deficit forecast in the next budget cycle is a conservative figure, Huizenga said, because it doesn’t include inflation. “Expect that one to get bigger,” he said.

MORE CUTS?

One “pretty strong possibility” is facing further unallotments of local government aid funding from the state at the end of the month. That happened to East Grand Forks in December 2008, when Gov. Tim Pawlenty’s unallotments cut $226,000 from the city.

Huizenga said the next cut could be even bigger — the $226,000 cut happened when the deficit for the previous biennium was $426 million. A deficit nearly three times that this time around could translate into something upward of $660,000, he said.

“I’m extremely worried about that because this happened last year, and it happened at the end of the year, so we had no choice but to absorb it into our fund balance,” Huizenga said.

The city was able to maintain an acceptable fund balance, “but just barely,” and he said the city couldn’t absorb a hit of this magnitude now without making big spending cuts.

East Grand Forks Mayor Lynn Stauss said there will be tough decisions. “The forecast does not look good for the state of Minnesota,” he said. “The legislators are definitely going to have to look at what they can do.”

Adding sales tax to clothing and raising taxes won’t quickly resolve the budget issues, he said, and the political parties need to work together to solve it. “It’s going to take good management and it’s going to be long-term.”

Pawlenty’s resistance to raising taxes has kept the tax rate low, but also has put a burden on some communities that rely on LGA funding, Stauss said.

“That makes you look at where can the city get money to replace LGA funding,” he said. “You can only go so far on raising fees … when finally you’ve got to raise tax revenues. But yet, you have to look at your city and say, ‘What can our people absorb?’”

Stauss said city leaders will need to take a hard look at how to cut spending and keep the city from developing its own deficit. If LGA cuts were made permanent, East Grand Forks could be forced to cut services and city jobs to save money.

“We’re going to have to look at everything thoroughly and decide what’s best for the community and the taxpayers that support us,” he said. “It’s not an easy decision, but it’s something that when you run for office, it’s the necessary things that have to be done so that the city can operate effectively.”

POLK COUNTY IMPACT

Polk County Commissioner Warren Strandell said county officials have been worried about the state budget for a couple of years and have already dealt with losing $490,000 of its $1.9 million in county program aid from the state for 2010.

“That’s what we’re going to get for 2010, but for 2011, that’s what the problem is going to be,” he said. “Another half-million-dollar cut or something close to that is really going to be bad.”

The county gets 10 percent of its total revenue through the aid, so losing nearly one-quarter of that funding was factored into the 2010 budget. Strandell said the budget made no allowance for salary increases, but the county still needs to go through negotiation processes with six different groups to work out contracts for its 304 employees.

County workers also are not receiving any cost-of-living raises, and a 15 percent increase in health premiums means more money will be coming out of employees’ pockets next year.

To balance the 2010 budget and keep the county’s tax levy to a 1.32 percent increase, department heads cut 2.5 percent from the 2009 budget. But those cuts are a one-year fix, not a permanent solution to the problem, he said.

“It was wherever we could get a little bit,” Strandell said. “We got right down now, so there’s nowhere left to be cut. That’s why 2011 is going to be such a problem.”

Most city residents in Polk County will see decreases in their tax bill next year because $33 million in new valuation went on the tax rolls, he said. But agricultural land owners will face big increases because tillable land increased 15 percent to 30 percent in taxable value last year.

Strandell said he’ll find out more about the forecast’s impact when he attends an Association of Minnesota Counties annual conference next week. “We’re just braced for the worst I guess.”

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