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Minnesota scrutinizes 40-year-old 'Miracle'

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State shutdown
A 40-year-old idea that shifted the way Minnesota pays for many local government services -- the "Minnesota Miracle" -- is getting new scrutiny as budgets tighten. The state's budget woes led to government shutting down for a time over the summer.
MPR Photo/Nikki Tundel

Forty years ago, Minnesota lawmakers created a new way to pay for local schools and governments. Reacting to skyrocketing local property tax rates in parts of Minnesota, they sought to equalize the system by sharing state tax dollars.

Now, that plan is under close scrutiny and, some would say, in jeopardy.

The idea known as the "Minnesota Miracle" in some ways seems to have come full circle.

"What the Minnesota Miracle did was make living in rural Minnesota certainly more viable," said John Chattin, city manager in Bemidji.

Bemidji is considered a tax-poor community. Property values are low. The per capita cost of providing basic services is higher than in larger, more affluent communities.

"If you don't want to subsidize rural communities, then we won't have rural communities."

So for many years, aid from the state accounted for half of Bemidji's general fund budget. Today it pays about 35 percent. Chattin says state aid allowed Bemidji and other small communities to thrive. He says without the help, some small towns would wither and die.

"If you don't want to subsidize rural communities, then we won't have rural communities," Chattin said. "I think it's that simple. You cannot compare a rural community with a metro community with the average cost of a home, the average incomes, none of those compare."

Over the past decade, Minnesota towns have seen a big reduction in state aid. Urban centers have seen a drop, too, including Minneapolis, St. Paul and Duluth.

A report from the Coalition of Greater Minnesota Cities shows cities and towns have seen a cumulative loss of more than a billion dollars in aid since lawmakers began cutting the program in 2003. Communities have responded by tightening budgets, cutting services and, in many cases, raising property taxes on homes and businesses.

The change forced many communities to trim fat and become more efficient. But some say that in the long run the loss puts communities in jeopardy.

If current revenue and spending trends continue without any policy changes, cities overall will see a 35 percent deficit by 2025, according to a study the University of Minnesota Humphrey Institute did for the League of Minnesota Cities.

Jay Kiedrowski, a senior fellow at the institute, said as aging baby boomers require more services from state and local governments, those services will require a larger chunk of the budget, leaving fewer dollars available for local government aid.

"The Minnesota Miracle has been diminished, if not eliminated," Kiedrowski said. "If I was a betting man I'd bet that there would be reduced local government aid for cities and counties into the future as human services costs go up.

"It's time to demand, in fact, that local units of government spend money better."

There are no easy answers, especially with the state expecting a billion-dollar-plus deficit in the next biennium. One option is to give cities greater flexibility in using a local sales tax as a source of revenue. That might be an option for regional centers, but wouldn't be much help for smaller towns.

The "Minnesota Miracle" is under close scrutiny. A legislative study group has been formed to examine what's working and what's not.

Some cities still spend too much money, said Rep. Linda Runbeck, R-Circle Pines. She chairs the House property tax division and suspects there's room for reform of the local government aid program.

Runbeck said it may also be time to dramatically rethink how Minnesota performs its government functions. Some have suggested eliminating township government and cutting the number of counties by more than half, for example.

"I don't know if it's been looked at as carefully as it should have been," Runbeck said. "A lot has changed over 40 years. It's time to demand, in fact, that local units of government spend money better."

"All of the sudden you've got the makings of exciting possibilities for change and restructuring," she said. "Hopefully we can make use of that energy and do some very important streamlining, redefining, refining of local government."

Many city leaders say there's no more fat to trim and any future aid cuts will lead to higher property taxes and fewer services. The debate over whether that's true will likely be along geographic lines, between rural communities and the wealthier suburbs.