Who’s in the toughest shape when local aid vanishes?

Who in Minnesota should worry most as state and federal officials put the squeeze on money that goes to local governments?

To name names:

Landfall (east of St. Paul, population 700).

Middle River (near Canada, population 322) .

Browns Valley (next to South Dakota, population 625).

That’s the conclusion of Chuck Marohn, who in March joined our MPR News Ground Level public forum panel on Baldwin Township and whose planning and consulting group has now ranked Minnesota’s cities on how vulnerable they will be if and when local government aid continues to shrink.

marohn.JPG

That’s a prospect that is becoming an assumption among leaders around the state and nation, by the way.

Marohn’s group simply calculated how much of a local property tax increase Minnesota cities would have to levy to replace the money coming from state and federal governments.

As the top of the list indicates, some small towns are clearly in the toughest shape, by his analysis. In the Top 50, only eight have populations over 1,000. The biggest of those is Chisholm, on the Iron Range, where Marohn figures the elimination of state and federal help would force a property tax increase of more than $2,400 on a house worth $100,000, unless spending dropped or revenue was found elsewhere.

Marohn’s conclusion in the report Vulnerable Cities:

State funding of local government activities has waned, placing intense pressure on cities to reduce services and raise revenue using their primary source of local funding: Property taxes.

He goes on to analyze the tax-and-spend divide this way:

  • It’s a revenue problem because property taxes are clumsy, regressive mechanisms that create a direct disincentive to more efficient land use. 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 property taxation.
  • It’s also a productivity problem. The most vulnerable Minnesota places produce local tax revenues that are less than what voters there demand. Using state and federal subsidy to meet core public needs is a way of addressing inequities, perceived or real. It also effectively tables discussion of how communities need to redesign their physical layout, infrastructure, or human capital to fund a higher percentage of total public services consumed.

After our conversations with him in Baldwin Township, I came to think of Marohn as the author of the “gravel roads” theory of local government spending: Faced with maintaining roads that new development is no longer able to pay for (he says it’s a Ponzi scheme to rely on future development to pay for services), maybe it’s a good thing to go back to gravel roads. As he told the Brainerd Dispatch the other day, “Congestion in an urban setting is not a bad thing.” That’s what city life is.

In a phone conversation this morning, he went so far as to suggest that one way to interpret the problem facing rural towns is that an inability to cope without state and federal help is an indication that metro areas are now subsidizing the small town life so many people (including him) cherish.

On the other hand, he offers more creative ideas than simply whacking away at the budget and saying sorry to residents. Local sales taxes and better comprehensive planning are two. But in the end, he says, the reality is some cities just won’t be viable in the 21st Century.

Maybe, he said, it’s a choice between hospice care and a new model based on smaller scale economies, not big infrastructure.

If that’s true, what principles will determine who lives and dies? Proximity to regional centers? Strong leadership? Tax base upheld by some large corporation? An entrepreneurial spirit? More cooperatives?

Marohn writes the Strong Towns blog about small town issues. You can find the city ranking here and if you want to look up a specific city, use this list.

Is there another way to interpret this analysis? Is there a role in some small towns for the big infrastructure approach to entice a big company?

  • Jack Geller

    There is little question that many rural communities will be less viable as LGA continues to shrink; and as I suspect, will soon go away. This is going to be hard for many communites and a redefinition and purpose for many rural communities will occur.

    But let’s not portray this as small rural communities with their hands out living off state and federal subsidies, while our urban communities and regional centers economically float their own boat. Nonsense!

    Number one on Mr. Marohn’s list: Landfall, MN receives $135,000 in LGA. How does that compare with the $91 million that Minneapolis receives; the $64 million for St. Paul; the $31 million for Duluth; $8 million for Mankato; $13 million for St. Cloud; or the $9 million for Rochester? Let’s also remember that all of these urban and regional communities receive federal CDBG funding through the “Entitlement Program” (yes … they acutally call it that!). And what is Landfall, MN entitled to? – $0.00. How about federal and state transit aid?

    Finally, rural communities are increasingly finding it difficult to get a bonding project included in the state bonding bill, as the standard now seems to be projects of statewide or regional significance (e.g., the new Guthrie or the Xcel Center).

    So if the point is to suggest that small rural communities will be increasingly challenged and financially stretched without LGA and other aid – I totally agree. But if the contrast is that our urban communities and regional centers are financially floating their own boat, so why can’t our rural communities do the same – I totally disagree with the premise.

  • http://www.strongtowns.org Charles Marohn

    I would not contend that urban communities are financially “floating their own boat”, but they are certainly closer – or have more opportunity to do so – than most of our small towns and rural areas.

    If we look at the numbers you cite – $91 million for MPLS, $64 million for St. Paul and $135,000 for Landfall – it is easy to say we could just have one MPLS or 674 Landfalls. That math is too simple. Here is a slightly more complex analysis:

    Subsidy/Tax Capacity

    MPLS: $91mil/$358mil = 0.25

    STP: $64mil/$227mil = 0.28

    Landfall: $135k/$25k = 5.4

    Sales Tax Collected/Subsidy

    MPLS: $458mil/$91mil = 5.0

    STP: $178mil/$64mil = 2.7

    Chisholm: $961k/$2.8mil = 0.3

    (I use Chisholm because I could not find sales tax data for Landfall).

    In aggregate, the state financially gets more of a return on monies spent in urban areas than in small towns and rural areas. Whether we like that analysis or not, it is becoming a factor in how our scarce resources are being allocated (as noted in your comment about the bonding bill). This will happen to an even greater degree once the next census reapportions representation, a process that will give even more clout to suburbs and urban areas at the expense of small towns and rural areas. That is due to demographic shifts, not politics (in fact, if anything, politics will counterbalance the trend).

    The answer here is not to rip each other to shreds fighting at the same trough. I advocate for small towns and, as our report suggests, they need to understand that the transfer payments they have relied on to survive – right or wrong – are not a stable source of income. The prudent thing for small towns to do is to start rethinking the assumptions behind their current development pattern – which costs more to maintain than it provides in wealth to maintain it – and to develop local strategies to become less financially dependent. That is easier said than done, but there are models for this. That is what our organization, Strong Towns, is all about.

    Whether or not you believe our big cities are contributors to the problem, our small towns have much less cushion for going without Local Gov’t Aid and a much lower margin for error in doing so. We are going to have to find ways to make them more self-sufficient or I fear a good many of them may simply cease to exist.

    -clm

  • Charles Marohn

    I was reading this post again and wanted to give a brief answer to one of the questions you raised. From the post:

    “Maybe, he said, it’s a choice between hospice care and a new model based on smaller scale economies, not big infrastructure. If that’s true, what principles will determine who lives and dies? Proximity to regional centers? Strong leadership? Tax base upheld by some large corporation? An entrepreneurial spirit? More cooperatives?”

    The one single factor that is going to determine success in the new economy is local leadership. There is not even a close second.

    We may look back at this period of time some day with the benefit of hindsight analytics and determine that there were other geographic, economic or social factors that had a significant effect, but there will be outliers and the thing that will separate those successful places from the places that have not been able to adapt and cope will be the local leadership.

    We are entering a new era for local governments where the traditional paths to prosperity are now the glaring problem. More infrastructure, wider roads, more commercial development, more residential subdivisions….. The return on those investments is mostly negative – long-term they hurt more than they help. Towns where the local leaders recognize this and can navigate through the reform and reorientation necessary to adapt will be the successful ones.

  • mulad

    I’ll note that Landfall is a town of “manufactured homes” — it’s essentially a trailer park that managed to get its own city charter. Clearly, a financially-limited community like that could easily slip into a situation where the populace couldn’t afford to pay their own way. If you divide their tax capacity by the number of people in the city, it works out to $35 a head. The tax capacity per person in Minneapolis is $917. In Wayzata, $3,981 per person.

    I wonder what the city’s actual budget is. Landfall is the most densely-populated city in the state, due to its small size (around 1/10th of a square mile) and closely-packed housing units. There are denser neighborhoods around the state (Whittier in Minneapolis is probably about twice as dense), but as a whole city, Landfall is on top. Even though they’ve got a really low tax capacity, maintenance costs probably aren’t too bad there.

    Still, if budget woes hit Landfall, they should probably just merge with a neighboring city like Oakdale. They might lose a unique identity, but there are many small towns in the Twin Cities that are trying too hard to stay as separate communities rather than joining together.