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M et t e ** StarTribune !Local budgets feel the squeeze Residents of many cities ing to have to lose some weight or of the nonpartisan Minnesota Tax- and counties are facing find the money for a new wardrobe, payers Association, "We're seeing a the prospect of reduced services even as tax levies go up. By Kevln Duchschere and Mary Lynn Smith Star Tribune StaffWriters For most cities and counties in the metro area, hammering out next year's budgets will be like the dilemma faced by a man whose clothes have shrunk: He's either go- Local officials must soon begin wrestling with the twin impacts of dwindling revenues -- including anticipated state aidcuts and ris- ing costs. Many are iust be'ginning to sharpen their pencils and don't yet know exactly ho~v they~l manage to balance their 2003 budgets. But they say the 'upcoming financial squeeze likely will strain services and kick property-tax levies higher. -"These are going to be tough times, for local governments," said Dan Saiomone, executive director weak economy and low consnmer confidence ... People's anxieties are high." To make matters worse, the local budgets approved later this year likely will be upended by mid-2003 if the Legislature, as expected, cuts local government aid and grants in an effort to resolve the state's pro- jected revenue shortfall. The news isn't getting any better. BUDGETS continues on Bg: · -- State deficit for 2004-2005 could be at least $1.9 billion. BUDGETS from B1 Cities, counties struggling as aid, other revenues slide An economic update released Friday showed that the state took in $212 million less than expected in fiscal year 2002. It already faced a projected $1.5 billion deficit for fiscal 2003. "The state is going to step back as the sugar daddy," Salo- mone said. "The days .of free money are over ... And that means local property taxes will go up." Fearing skyrocketing taxes, the Minneapolis City Council voted Friday to limit-annual levy increases to 8 percent through 2010. But with costs rising faster than inflation, tax limits also will mean deep spending cuts. Even communities inclined to raise taxes as high as neces- sary will face a squeeze im- posed by new lower lew limits set by a state formula that blends inflation with housing and commercial growth, said Jim Mulder, executive director of the Association of Minneso- ta Counties. Brooklyn Park expects to be limited to a tax-levy increase of about 2 percent, which will yield an additional $350.000, interim city manager and fi- nance director Greg Andrews said. But that won't be nearly enough to cover an expected budget gap ranging from $1 million to $2 million, he said. "The city's growing, the tax base is growing, but the taxes we can levy to meet demands for services are not going up," Andrews said. Mulder said that counties also will see expenses rise as inflation and increased service demands continue "Costs for such things as as- phalt and oil are up," he said. "We're building more jails and we're filling them with more people, so there's the added cost of keeping them open." For example, Ramsey Coun- ty officials expect to open their new jail by the end of next year, driving up county spending, budget director iulie Klein- schmidt said. And there are other new ex- penses for 2003 that reflect events outside the county's control. They include court- house security measures or- dered after the Sept. 11 terror- ist attacks, spending hikes to accommodate a state takeover of the district courts and sever- al mandated services for feder- al and state programs. The local tax ba~e is fairly stagnant and additional money sources are drying up, Kleinschmidt said. "The big- gest bind for us is the econom- ic recession," she said. But even growing commu- nities will face tough choices. Dakota County's growing pains include increased de- mands for services (including parks and public health ser- vices), more roads and better transit to relieve commuting problems, said Jack Ditmore, director of Dakota County's operations, management and budget. Balancing next year's bud- get could mean up to a 6 per- cent property-tax levy in- crease, compared with annual increases of about 4.5 percent in recent years, Ditmore said. Dakota County commissioners have already rejected a 9 per- cent increase to keep services at current levels. "They won't use a tax in- crease to fill the hole," Ditmore said. All the budget pressures have local officials feeling anx- ious and cautious, said Jim Miller, executive director of the League of Minnesota Cities. "It's a time of significant uncer~ tainty," he said. Following are some illustra- tions of the problems and po- tential solutions facing a vari- ety of local governments. ~ St. Paul: Mayor Randy Kelly insists he won't raise tax- es to bridge a projected gap of $13.6 million, saying he in- tends to keep his campaign pledge to avoid a tax increase in 2003. St. Paul has not in- creased its property-tax levy sincE, before Norm Coleman became mayor in 1994. That doesn't mean that Kel- ly won't consider raising user fees for some nonessential city services ranging'from business alarm systems to business li- censes, Budget Director Peter Hames said. "The mayor is a strong be- liever that where there is a ser- vice charge, it should cover the cost of the service," Hames said. Even after trimming spend- ing by $2 million and grabbing a $6 million slice of the city's reserve funds, the city must still find another $6 million to balance the 2003 budget, Hames said. Kelly already has provided some clues on how he will do it. He froze city hiring earlier this year and cut $1.3 million from this year's budget by eliminating 11 positions and merging some functions. He will soon announce a plan to reorganize the city's recreation cenmrs,-Hames said. "There will be .other re0rga- nizations, some to save money and some because it'makes more sense. Everything's on the table'with him," Hames said. ~ Hennepin 'County: With.a 2002 budget of about $1.7 bil- lion, officials in the state's larg- est county will have to decide how to cover a $32 million gap that includes $10.5 million in state cuts for human services and corrections, and a $21.3 million increase in salaries, benefits and library opera- tions. "Our board will be faced with the choice of levying ver- sus reducing service and pro- gram levels. Somewhere in be- tween the two will be the real answer," Budget and Finance Director lim Ufer said. Hennepin County has kept property-tax levy increases un- der 4 percent for several years, and officials don't want to ven- ture much beyond that, he said. Last year's levy increase was 3.35 percent. Already, Ufer said, the board is weighing cuts in this year's budget to prepare for next year's costs and expected state cuts. "What they're doing now is taking a disciplined approach to belt:tightening and expen- ditures,'' he said. ~ Ramsey County: Interest rates are at a 40-year low, shorting Ramsey County $2.4 million in investment income that was projected for the 2002 budget. Uncollectable proper- ty taxes are on the rise, putting another $1.3 million dent in this year's budget. Added to that is a $1.6 million cut in state funding primarily for human services and corrections, leaving Ramsey County with a $5.3 million hole in the current year's spending plan. The cuts county officials make this year to erase shortfall likely will be made permanent ino2003, Klein- schmidt said. "Commissioners will have to make some extremely tough choices by either cutting ser- vices or raising taxes, or some combination.' she said. ~ Bloomington: City offi-' ciais have instructed c[epart- ment heads to keep budgets at or below the inflation rate in an effort to hold next year's tax !evy close to its annual average increase of just under 2.5 per- cent, City Manager Mark Bem- hardson said. But Bloomington may be better prepared for what's coming than other communi- ties, he said. When the econo- my was humming five years ago, officials developed an eco- nomic strategy to deal with fu- ture downturns. The result, Bernhardson said, is that the city avoided ex- panding services that couldn't be sustained in bad times. Offi- cials may have to make spend- ing cuts, but services shouldn't suffer much, he said. Nevertheless, Bernhardson said he doesn't underestimate the gravity of the problems just around the corner. Budget offi- cials have exhausted the quick and easy fixes, leaving only the tough choices. "This is a tougher year,.and it's probably as tough a year as most communities have faced since '89, '90, '91." he said. "The bubble isn't out of the econo- my yet and we may dip again . .. We may not be out of the woods for a few years and that will make it very tough." -- Kevin Duchsehere is at kduchschere$startribune, con~ .-- Mary Lynn Smith lsat tnlsmith ~startribune. com.