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3.c) State Budget Deficit State Budget Deficit !� ' � Page 1 of 2 5c� r��r� �/v�/C r�i�a ��'�x��rc�-� o �� o � = �' �i, l��' < 3. �� :� ��<�uf:�,E � d�G = / r� l MC Ntsc�ln � � ��f /�(j �� D� /d ✓ 11l t� State Budget Deficit �� /7�/1� a� � �,��jl7 Governor cuts nearly $193 million in state aid to cities a�� = A` � Gov. Pawlenty on)une 16 announced his plans to eliminate the remaining $2.7 billion state budget deficit. His plan includes $64.2 million in cuts to local government aid (LGA) and market value homestead credit (MVHC) reimbursement for cities in 2009, and $128.3 million in 2010 cuts. The 2009 cut will be computed as 3.31 percent of each city's levy plus aid. For 2010, the percentage reduction will be increased to 7.64 percent. Cities with populations under 1,000 that also have below average property tax bases will be exempt from cuts in 2009 and 2010. • View a spreadsheet from the Department of Revenue showing a city-by-city list of the cuts (pdf) The details • The cuts to cities will be computed as a percentage of each city's levy plus aid (certified 2009 levy plus certified 2009 LGA plus taconite aids). This is the same basis used for the December 2008 unallotment reductions and it is the basis that has most frequently been used by the legislature and governor when cuts have been imposed.The House plan would have distributed the cuts as a flat percentage of each city's adjusted net tax capacity. • The cuts are substantial. The 2009 cut will be computed as 3.31 percent of each city's levy plus aid. For 2010, the percentage reduction will be increased to 7.64 percent. According to the governor, no city will have a reduction greater than the original cuts proposed by the governor in his January budget.The cut is first taken from a city's LGA and then from MVHC if necessary. No other aid programs are affected by the cut. • Cities under 1,000 population that also have below average property tax bases will be exempt from cuts in 2009 and 2010. According to the governor, this will exempt 454 cities from the 2009 and 2010 reductions. Under last December's unallotment, all cities under 1,000 population were exempted. • No city cut will exceed $22 per capita in 2009 or$55 per capita in 2010. • For cities, approximately one-third of the reduction will occur in 2009 and two-thirds will occur in 2010.This"backloading" of the cuts will allow cities the most flexibility and longest time frame to make budgetary adjustments. • There is a special exemption from the cuts for the city of St. Charles for 2009 only. This exemption is related to the fire that destroyed a processing plant in the city earlier this year. • Levy limit cities (cities over 2,500 population) will be able to declare"special levies" in 2010 to replace all or part of the losses for the December 2008 and the 2009 unallotments.This authorization was enacted in 2008 at the urging of the League of Minnesota Cities and the Minnesota Inter-County Association. In addition, if the 2010 unallotments are effectuated (actual reductions have been made in state accounting system) in early July along with the 2009 unallotments,the 2010 levy limits will reflect the loss of LGA and MVHC under the 2010 reductions. This will increase the limited levy by the amount of the 2010 aid and credit losses. In other words, for taxes payable in 2010, levy limit cities will be able to increase their property tax levy for all of their 2008, 2009 and 2010 aid and credit losses. Several cities have told the League that due to the economy and local budget concerns, there is no way their city can raise taxes to cover the 2008, 2009 and 2010 losses in one budget year. Due to the fact that the 2008 and 2009 losses can only be declared a"special levy" in 2010, this authority cannot be carried forward into 2011. In addition, when the levy limits are computed for cities for 2011, the LGA appropriation is restored--at least under current law. As a result, when the 2011 levy timits are computed, the current law restoretion of the LGA appropriation in 2011 will again reduce the levy authority for levy limit cities. In the event that levy limits cannot be repealed next session, the league's policy committees will likely consider a position to allow greater flexibility for unused 2010 levy authority. In addition to last year's unallotment special levy provision, the 2009 omnibus tax bill (Chapter 88) will now allow all cities to recertify their property tax levies by)an. 15 if the December LGA or MVHC payments are further unallotted.The League had suggested this option last January, but some key legislators and the governor initially balked at the idea. Rep. Ann Lenczewski (DFl-Bloomington)decided to include this provision in the House tax bill and, after the League discussed the proposal with Revenue Commissioner Ward Einess and senators on the tax conference committee, the language was added to Chapter 88. Chapter 88 also includes a levy limit provision that wil�treat future cuts in MVHC in a way that is similar to the treatment of LGA cuts. Under the current levy limit law, future certified reductions in LGA automatically result in an increase in a city's levy limit. In contrast, MVHC is a replacement for a portion of a city's property tax levy and as a result, future reductions in MVHC do not result in a similar increase in a city's levy authority. Under Chapter 88, cities that lose MVHC will be allowed to declare a special levy for the estimated subsequent year's loss. Background information The 2009 legislative session ended on May 18 and the budget bills approved by the governor left roughly a $2.7 billion imbalance in the state's upcoming 2010-2011 biennial budget. During the waning hours of the session, the governor indicated that he would address any remaining shortfall at the close of the session through unallotment. The Legislature sent him a last minute bill that would have plugged the remaining budget deficit largely by"shifting"$1.8 billion in school revenues, but that bill also included roughly gi billion in tax increases and as a result, he vetoed the bill, setting up the June 16 announcement. Under unallotment, the governor can reduce, delay or defer state appropriations in order to balance the state's budget. According to House Research Department, governors have only exercised their unallotment authority only four times since the law was enacted in 1939. Gov. AI Quie unallotted $195.1 million during the 1980 budget crisis, Gov. Rudy Perpich unallotted $109.8 million in 1986, Gov. Tim Pawlenty unallotted $281 million in 2003 and then he unallotted $271.6 million this past 1.��.,..//........, 1.....,. ..«,_/.....,�../1 /,.a..a.. L..,7._..a _,.� �n iinnnn State Budget Deficit Page 2 of 2 December. With a remaining deficit of roughly $2.7 billion, the pending unallotments by the governor would be by far the broadest and largest exercise of the power. In addition, we believe that the unallotment power has never been exercised at the beginning of the state's biennium. Levy limits remain Levy limits will stay intact, with a couple of modifications that were contained in chapter 88 (HF 1298), the less controversial tax bill passed and signed into law on May 16. Read more about levy limits Your LMC Resource For more information about the state budget deficit, contact the League's intergovernmental relations (IGR) staff. Contact Gary Carlson IGR Director (651) 281-1255 or(800)925-1122 gtarlson@Imc.org Subscribe to Cities Bulletin The LMC Cities Bulletin covers current legislative news and tells you what it means to cities. The E-Bulletin, delivered each week to your e-mail inbox, is free. View the order form to subscribe to the free E-Bulletin (pdf) View the current issue of Cities Bulletin CopyrigF�t �,2UU9 League of Minnesota Cities, 145 University Ave. W, Saint Paul, MN 55103-2044 � Phone: (65]) 287-12U0 � Toll-Free: (800) 925-1122 1.F4«.//......... 1«.... ....../«,.,�../1 /..�,.a.. 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