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The reasons behind Minneapolis' $55 million budget problem
by Art Hughes, Minnesota Public Radio
January 16, 2003

A decade of deficit spending, a faltering economy, high insurance costs and a reluctance to raise taxes all play into the city's projected shortfall of $55 million over the next five years. The city council is expected to vote this month on plans to, among other things, trim police department spending more than $12 million over the next five years and limit all employee pay raises to two percent a year.

Minneapolis, Minn. — A recently completed five year outlook puts the fate of the popular Neighborhood Revitalization Program in doubt, severely curtails all community development, and trims spending from every department.

Mayor R.T. Rybak says it's taken a year to uncover what he considers a failure to address past excessive spending.

"In the early to mid-'90s, there were some well-intentioned elected officials in Minneapolis who said they wanted to hold the line on property taxes, and I respect that value," Rybak said. "The problem is they didn't hold the line on spending. So less money was coming in, but spending was going up. I think one of the things we're discovering is they may not have even known it was going up in certain areas."

The deficit spending collected in a part of the budget known as the internal service funds. The total deficit at one point grew to as much as $68 million. For explanation purposes, City Finance Officer Pat Born refers to the funds as the company store. Born calls the practice of not paying back what was owed the funds a "defective process".

"With any particular tax level you still have to spend within your means," Born said. "What we were doing was spending on things through the company stores, and not charging back the users of those equipment and services for things they were using and buying."

A large chunk of the money owed Minneapolis' company store came not from spending, but from an accounting change that, virtually overnight, required the city to cover more of its self-insurance liability. But the rest came from purchases like police cars, fire trucks and computers that elected officials deemed necessary.

In 1996, for instance, the year Minneapolis' murder rate reached the highest number ever, the Council added 55 police officers, mostly so-called "Clinton Cops," which were federally subsidized for only three years. The council also set aside money for 90 new police cars, while not increasing the property tax levy.

Veteran City Council Member Barbara Johnson bristles at the mayor's use of the phrase "excessive spending." But she says the divided nature of the council in the '90s contributed to spending on some pet projects.

"All you have to do is pull one person over to make the move to spend the dollars for information technology, which was a burgeoning part of the city's infrastructure and continues to be, or the application for 'Clinton cops,' which you know down the road are going to have to be paid with general fund dollars," Johnson said. "You just need to pull one person over with you. So I see that kind of dynamic playing into how decisions were made here."

The deficit is only part of the city's problem. The city must sell around $160 million in bonds to cover a devaluation of employee pension funds caused by the down stock market. Employee health insurance costs rose 19 percent. And the Legislature's 2001 change in how the city uses Tax Increment Financing cut off a main source of funding for the Neighborhood Revitalization Program.

Rybak also says the city budget didn't benefit as much as it could have from rising downtown property values, because much of what was built is in a tax increment district and the proceeds are restricted to other development uses. "The problem is, every time they did that they took that tall office building off the general tax rolls and used it to pay for a special project," Rybak said. "Had that not happened, and had that tax increment property stayed on the tax rolls, we would not be in anywhere near a serious situation we're in today."

As dire as the current financial projections are, they don't take into account the likelihood of cuts this year in state aid to cities. Local government aid makes up nearly 40 percent of Minneapolis' general fund.

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