What If State and Federal Support Evaporated Tomorrow?

At Strong Towns, our focus is identifying ways communities can improve and strengthen, and how local leaders can most effectively cultivate a secure, prosperous future. Our latest analysis illustrates that many local governments are exposed to a risky dependence on state and federal funding that grows less sustainable – and less predictable – by the year.

As we’ve outlined in examples in prior Strong Towns Blog posts and in the Placemaking Principles on the website, the Strong Towns we are working toward are financially durable. Residents are able to reduce costs associated with inefficient land use, transportation and development, and reinvest these savings to strengthen their long-term position in the global marketplace. We believe strongly that managing the risks that face communities is critical.

Many local governments have developed a financial structure that’s highly exposed to the risk that state and federal funding diminishes in the future. These communities rely on state and federal funds to provide services that include streets and highways, parks and open spaces, economic development and public safety. With a growing, structural state budget shortfall, Minnesota is likely to reduce aid to local governments in the 2010 legislative session and beyond. The limits of federal treasure, we believe, will lead to reductions in aid and grants to local governments as the burden of entitlement programs and debt service powerfully squeeze the national purse.

Consider the results of our analysis, which seeks to answer the following question: If state and federal aids disappeared tomorrow, and citizens wished to maintain the same level of services, how large a property tax increase would be required? In other words, how vulnerable are communities to federal and state revenue reductions?

• The 50 Minnesota cities most reliant on state and federal aids and grants are all cities with population under 5,000. 
• In Browns Valley, Minnesota (one of the state’s most reliant cities on state and federal funds for its operations), a typical homeowner would have his or her property taxes increase 170%, from roughly $3,560 to over $9,690, if property taxes replaced state and federal funds.
• Newer suburbs currently rank among the least reliant on state and federal revenues in the analysis. However, in many cases this is because big-ticket infrastructure is in the early stage of its life cycle.
• Minnesota’s two biggest cities – Minneapolis and St. Paul – are each less reliant on state and federal revenues than the state median.

Some of our colleagues will respond that this is a spending problem, and others will argue that local governments are forced to rely on state and federal sources because their primary funding mechanism – property taxes – is insufficient to provide the services their citizens demand.

Our view at Strong Towns is that both perspectives are fair and accurate. It’s a spending problem because we as citizens are accustomed to consuming local police protection, clean water and well-maintained streets which we do not fully fund through local taxation. It’s a revenue problem because property taxes are clumsy, regressive mechanisms that create a direct disincentive to more efficient land use. The compromise position between these views is to keep doing what we’ve always done – which is unproductive and undermines our long-term future.

The intent of programs that share state and federal revenue with local governments is generally to address inequities across the state or its regions, and to ensure that essential public services are provided to citizens in hamlets and large cities alike. This is a critical element of a fair, productive system of taxation and public investment. Still, communities’ reliance on state and federal revenues is a wanton gamble, both for the cities themselves and for the state and federal taxpayers on the other end of the bargain.