2002-08-26 CC Worksession - Laserfiche WebLink

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. , I .. State Deficit: How we got here Last fall, the state announced a $2 billion budget deficit for the remainder of the 2002-2003 biennium. In February, the deficit estimate was increased to nearly $2.5 billion. The 2002 legislative actions to address this deficit arguably tapped most of the easy solutions, including the use of state reserves and the elimination of automatic inflation assumptions for many state programs. The budget solution also included the elimination of the TIP grant pool, delays in school aid payments, and some cuts in state agency budgets. Now, the state is facing an additional deficit for the 2004-2005 biennium. Given that many of the easy solutions have been employed, the problem confronting the 2003 Legislature will almost certainly be more difficult to address. State agencies are already being asked to prepare preliminary budget proposals at a 90 percent funding level. This 10 percent planning reduction reflects the approximate across-the-board cut necessary in state spending to address a deficit in the $2.7 billion range. IT a 10 percent cut is extended to general city aid programs, cities would collectively lose approximately $59 million of local government aid (LOA) and approximately $10 to $15 million of market value homestead credit (MVHC) reimbursement. Remember, even if your city does not receive LOA, the state effectively pays a portion of your property tax levy through the MVHC reimbursement. The State could reduce this payment to the city, thereby reducing the amount of property tax levy you expected when the levy was originally certified. IT the Legislature ultimately decides to make cuts in state aid and credit programs, it will have to decide how to distribute the impact to cities and counties. IT potential future cuts are computed in a manner similar to past state aid reductions, every city would likely lose a similar percentage of their revenue base (defined as the city's certified levy plus its certified LGA). A cut on this basis could be between 4 percent and 5 percent of each city's revenue base. Again, that cut could conceivably come fromLGA, theMVHC, or both. There are other state aid and revenue sharing programs that could potentially be cut, such as police and fire aids, certain transportation aid programs including the Municipal State Aid (MSA) program, and police training reimbursement aid. Likewise, further cuts in state agency budgets could have a trickle-down impact on city budgets-either through higher agency fees and assessments or through reduced services that must be picked up in local budgets. Of course, there is no way to determine the size of the state deficit before the forecast is updated in November, nor is there any way to predict how the Legislature might implement appropriation reductions. Given that city aid programs were largely spared from the 2002-2003 budget cuts, we suspect there may be political pressure to "share" the state's 2004-2005 budget woes with cities. This uncertainty clearly makes financial planning for 2003 extremely difficult. We should know more in late November or early December when the next state budget forecast is released. However, you are already preparing your 2003 budget and you must set your preliminary property tax levies long before the state budget forecast will be announced.