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Total revenue of all Minnesota counties is down modestly over the last decade, after adjusting for inflation and growth in the state’s population. The largest portion of this decline is the result of a steep reduction in state aid to counties, which had the predictable outcome of spurring property tax increases.

Data used in this analysis is from the 2014 Minnesota County Finances report, published by the Office of the State Auditor (OSA) earlier this year. In recent years, the OSA has included information in the annual county finance report showing revenues and expenditures in inflation-adjusted dollars. This was a major enhancement to the report, insofar as it allowed the public to gauge the real change in county finances over time after adjusting for erosion in the purchasing power of the dollar. The 2014 county finances report shows the trend in real (i.e., inflation-adjusted) county revenues from 2005 to 2014. The report adjusts for inflation using the Implicit Price Deflator (IPD) for State & Local Government Purchases. As noted in a February 2016 North Star article, the state and local IPD is the preferred index for adjusting state and local government finances for the impact of inflation.

Throughout the period from 2005 to 2014, real county revenues remained fairly constant, hovering between $4.6 billion and $5.0 billion. As the inflation-adjusted data in the 2014 OSA County Finance report is expressed in constant 2005 dollars, amounts in this article will also be presented in 2005 dollars.

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While total revenues remained flat, there was significant variation within specific categories. Real state aid to counties declined by $269 million from 2005 to 2014, a decrease of 18.4 percent. As noted in the OSA report:

One factor that might have caused intergovernmental revenues [i.e., state aid] as a share of total revenues to decrease is the reduced State funding for the County Program Aid (CPA) and the Homestead Market Value Credit (HMVC) programs. Due to ongoing state budget deficits, the CPA and the HMVC programs were subject to cuts and flat funding over the ten-year period. In addition, after several years of reduced funding levels, the state eliminated the HMVC program in 2012. The CPA and HMVC programs accounted for 7.4 percent of county total revenues in 2005, compared to 3.5 percent in 2014.

The principle mechanism used by counties to recoup the large decline in real state aid was increases in property taxes. From 2005 to 2014, county property taxes increased by $289 million in 2005 dollars—a jump of 15.2 percent. As a result of these and other changes, inflation-adjusted county revenues increased by 2.8 percent from 2005 to 2014.

The 2014 OSA County Finances report examines trends extending back to 2005. However, the largest decline in real state aid to counties occurred in years just prior to 2005. Total real state aid to counties declined by 18.4 percent ($329 million) from 2002 to 2005, based on information from earlier OSA County Finances reports. In aggregate, state aid to counties declined by nearly $600 million—approximately one-third—from 2002 to 2014. Property tax increases helped to recoup just over half of this lost state aid; however, even after property tax increases and changes in other revenues, total real Minnesota county revenue declined by just under one quarter of a billion dollars—or 4.8 percent—from 2002 to 2014.

Increases in population create a demand for increased county services and, consequently, for increased county revenues. Using population data provided in the OSA reports, it is possible to determine the change in county revenues over time in real dollars per capita. Real county revenue declined from $914 per capita in 2005 to $896 per capita in 2014—a modest 1.9 percent reduction.

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After factoring in population growth, the real per capita decline in state aid to counties swells to 22.6 percent—from $280 per capita in 2005 to $218 per capita in 2014. The decline from 2002—when state aid was $355 per capita—to 2014 was a whopping 38.6 percent. Most, but far from all, of the decline in state aid over these periods was recouped through increases in other revenues—most notably, property taxes.

As cuts in state aid led to real per capita reductions in county revenue, a significant state aid increase in 2014 helped county revenues to rebound. However, real per capita county revenues remain below the 2005 (and 2002) level, despite the fact that spending pressures on counties have mounted over time. For example, an aging state population resulted in increased health and human service costs. In addition, changes to state law pertaining to child protective services have resulted in additional investigative, court, and out-of-home placement costs, while a significant share of the cost of treating mentally ill prisoners who have committed a crime has shifted to counties. A long list of state mandates—including, but not limited to, unreimbursed costs pertaining to Medical Assistance, income maintenance, detoxification services, and sex offender detention—has created increased spending pressures for counties at the same time that real per capita revenue has fallen.

Aid increases enacted in 2014 helped to reduce some of the pressure on county budgets and property taxpayers. However, real per capita aid to counties remains well below the level it was at in the early years of the new century. The second part of this series will explore trends in Minnesota county expenditures based on OSA data.

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