Cities, States Wrangle Over Cuts to Local Aid

In Minnesota, Republican Gov. Tim Pawlenty’s cuts in state funding to local government forced cities and counties to consider their own round of layoffs, furloughs and benefit freezes. State reductions were so troubling in Massachusetts that three cities are now deciding whether to cancel their primary elections to conserve cash.

And in California, the possibility of state lawmakers siphoning local governments’ gasoline tax revenues prompted 180 cities to threaten to sue the state to get their money back.

Around the country, a number of states desperate for cash have tapped heavily into money intended for counties, cities and towns, creating friction between state and local governments. Although many of these municipalities once believed state funding would buffer them from decreasing revenues and increasing deficits, they now realize that their states are less likely- and less able- to protect them from the recession.

States confronted an unprecedented $142.6 billion in budget shortfalls in their 2010 budgets, according to the National Conference of State Legislatures (NCSL). To close those gaps, lawmakers took a variety of actions, from cutting programs and employees to tapping reserve funds and stimulus dollars to levying new taxes.

Some states also slashed local aid, stressing counties, cities and towns that are also required by law to balance their spending plans before the start of their fiscal years. These local governments, which have depended on state dollars to offer services and programs, now fear they will have to make up the difference through deeper cuts or higher local taxes at a time when they are already squeezed by a decline in property tax revenue.

The split between city and state lawmakers has grown especially tenuous in Minnesota, where Pawlenty recently stripped .5 million in local-government aid from the state’s two-year budget – a cut equal to about $55 for each Minnesotan, according to the state’s revenue department.

Although Minnesota law permits reductions of that size, the sudden drop in funding has challenged local officials. According to Rachel Walker, manager of policy analysis at the League of Minnesota Cities, the trouble is the timing: Minnesota’s localities, which operate on the calendar year, anticipated money from the state that has a fiscal year that begins July 1, common to most states. That means cities are now faced with coping with less state money halfway through their own budgets.

“It’s very frustrating because they were told last July (2008) what they would be receiving in 2009, and six to eight weeks before the first check arrives, they find out it’s actually going to be a lot less,” Walker said, adding that Minnesota cities are considering layoffs and furloughs to stay out of the red.

In fact, about a third of all U.S. cities operate on a similar fiscal timetable, which means state cuts to local aid can open sudden holes in local budgets, said Chris Hoene, the director of research at the National League of Cities, an advocacy group of more than 19,000 municipalities.

But even in other localities that operate on the same fiscal calendars as their states, the cuts are proving troublesome. Cities and towns that view themselves as partners with the state in providing services see these cuts as an unfair shift in burden, Hoene said.

Local officials in Pennsylvania are struggling with that problem. The failure of the state’s legislature to enact a budget by the July 1 fiscal deadline has forced county governments to dip into emergency reserves to preserve local services, including day care and transportation programs usually financed by the state. “We have no choice but to continue the programs,” Pam Snyder, chairwoman of the Greene County Commissioners told the Philadelphia Inquirer . “I feel like I’ve been hit by a Mack truck.”

In Massachusetts, local governments are weathering more than $400 million in cuts in fiscal year 2010, said John Robertson, a deputy director at the Massachusetts Municipal Association. The reductions have forced local officials to impose furloughs, benefit reductions, pay freezes and layoffs. To fill the remaining gaps, a number of towns have also considered cutting electrical power to some streetlights to save money, Robertson said. Three cities – Methuen, Revere and Lowell – are discussing whether to cancel their low-turnout, but expensive, primaries this fall to save money for other programs.

Massachusetts, like Minnesota, can legally trim municipal aid when it can no longer afford to provide it. But elsewhere, states’ obligations to their local governments are more ambiguously defined. The lack of clarity surrounding some of this year’s cuts has sometimes pitted local officials against state lawmakers in battles that have sometimes reached the courts.

Lawmakers are still squabbling in California over more than $1 billion in local gas tax revenue. At the start of the year, state lawmakers hoped to tap the gas tax fund to help close their $42 billion budget shortfall, the nation’s largest gap. But the state’s municipalities, which rely on the money for road upkeep, claimed their revenue was shielded from state raiding. By July, 180 cities had passed resolutions threatening to sue California if it included the gas tax provision in its budget compromise. Fearing another standoff, the Legislature balked and cities backed down from their fight.

Local officials across the country say they doubt their states will restore the funding that has been cut. In June, NCSL said that more than two-thirds of states expected to encounter significant budget gaps in fiscal year 2011. Those revenue concerns and dwindling federal stimulus money have local governments concerned that this year’s cuts could be next year’s realities – or worse, signs of even bigger state allocation reductions to come.

“What we’ve seen in past 20 years… is that (local) aid programs are cut or eliminated as ways to solve the recession and they don’t come back,” Hoene said. “It’s always source of consternation for local governments.”

See related stories:
States’ budget pain eclipses last recession (7/21/2009)
Stimulus to ease, not fix, state budget woes (2/14/09)
States, cities spar over stimulus money (12/18/08)