Real City Revenues Drop Over the Decade

Despite significant population growth, the inflation-adjusted revenue of all Minnesota cities has declined by six percent from 2006 to 2015. However, the decline is not spread evenly across all revenue categories. Property taxes climbed significantly over the decade, but not by enough to replace losses in real federal and state aid and other revenue sources.

The newly released Minnesota City Finances report from the Office of the State Auditor (OSA) not only documents the 2015 revenues and expenditures of all Minnesota cities, but summarizes changes in each over the ten-year period from 2006 to 2015. The report adjusts these amounts for inflation using the Implicit Price Deflator (IPD) for State & Local Government Purchases, thereby enabling the public to see the change in the real purchasing power of city revenue over time. 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. The OSA’s city finance report is the city equivalent of the OSA’s county finance report that was summarized in a November North Star article. As the inflation-adjusted data in the 2015 OSA city finance report are expressed in constant 2006 dollars, amounts in this article will also be presented in 2006 dollars.

From 2006 to 2013, total Minnesota city revenue declined from $4.48 billion to $3.98 billion—a decline of 11.2 percent. From 2013 to 2015, total city revenue increased from $3.98 billion to $4.21 billion. After all of these fluctuations, total 2015 city revenues were still 6.0 percent less than in 2006.

city-rev

Most of the one-half billion dollar decline in city revenue from 2006 to 2013 was the result of a $275 million (28.5 percent) reduction in state aid*; most—but not all—of the decline in state aid was recovered through a $236 million (17.1 percent) increase in city property taxes. A significant portion of the state aid loss was restored in 2014 and 2015, primarily through increases in city Local Government Aid and transportation grants. State aid increases in 2014 and 2015 were the single largest contributor to the increase in city revenue from 2013 to 2015. Despite these increases, total state aid to cities declined by $123 million (12.8 percent) from 2006 to 2015, and the fiscal situation of cities was further compromised by a $53 million (28.5 percent) decline in federal aid over this period.

Using data from earlier OSA city finance reports, it is possible to examine changes in state aid and city property taxes since 2002—the year of major changes to Minnesota’s property tax system. From 2002 to 2006, state aid to cities declined by $278 million (22.4 percent), which contributed to a $230 million (20.0 percent) increase in city property taxes. During the entire period from 2002 to 2015, state aid to Minnesota cities declined by $401 million (32.2 percent). A portion of the aid loss was recovered through increases in property taxes and other city revenues, so that the total city revenue loss over this fourteen-year period was $283 million (6.3 percent).

From 2006 to 2015, the population of Minnesota cities is estimated to have increased by 7.0 percent; this growth in population contributes to increased revenue need for cities. Using data from OSA city finance reports, it is possible to calculate the change in city revenues per city resident (i.e., per capita). City revenue declined by $164 per capita (15.6 percent) from 2006 to 2013 and increased by $36 per capita (4.0 percent) from 2013 to 2015. During the entire period from 2006 to 2015, city revenue declined by $129 per capita (12.2 percent).

city-rev-pc

During the period from 2002 to 2006, total city revenue declined by $54 per capita (4.9 percent). During the entire span from 2002 to 2015, city revenue declined by $183 per capita (16.5 percent). Two-thirds of this revenue loss was due to declining state aid, which fell by 39.6 percent over this period.

State aid increases in 2014 and 2015 helped to partially reverse a long-term decline in city revenues over the last ten years. Nonetheless, real city revenue declined significantly from 2006 to 2015, as increases in some revenue categories—such as property taxes—were insufficient to replace reductions in others—such as state and federal aid. The percentage decline in city revenue reaches double digits if we factor in growth in city population by examining these changes on a per capita basis. The decline in city revenue is even greater if we extend the analysis back to 2002, when major state property tax changes were implemented.

Part two of this series will examine trends in city expenditures based on OSA data.

 

*As used in the OSA’s City Finances report for 2015, state aid to cities includes city Local Government Aid, transportation grants, police aid, Public Employees Retirement Association aid, and various other categories of state aids and grants.