The State/Local Relationship is Not Immune

From the September-October 2017 edition of Fiscal Focus.

“A certain substance,” as the saying goes, rolls downhill.  So while our annual meeting panels discussed the potential implications of federal tax reform and federal budget resolutions for Minnesota, it’s not unreasonable to reflect on what the implications could be downstream:  the state’s relationship with county and municipal governments.

We’ve already seen some evidence of fiscal obligations being passed along to local units of government to deal with.  For example, any “what the heck” moment when you take a look at your Truth in Taxation notice in about a month may be partly due to the $20 million tab for assessments for people with disabilities which the state passed along to counties this year.  But that could be a drop in the bucket if some of the changes being talked about in Washington ever get enacted.

If state governments get saddled with substantially more of the financial responsibility for delivering various services while at the same time federal tax obligations go up for a third of Minnesota households, you can bet the effect would reverberate down to the local government level.  Even if federal actions turn out to be all bark and no bite, demographics alone have the ability to alter the state/local relationship as our own budget trends study commission found.  The question is whether our policy dialogue is reflecting this understanding.

We don't see much evidence of that.  Municipal and county government representatives appear remarkably sanguine about a nearly $900 million state intrusion into their primary tax base and quite supportive of the idea of having that grow both automatically and indefinitely.  Meanwhile, editorial pages endlessly rhapsodize about the state/local relationship that existed decades ago and exhort a return to policies of a bygone era rather than explore policy paths that recognizes what our future holds.

It’s not an accident that city and county aids have diminished or stagnated depending on how you choose to view the trends.  It’s not malevolence toward local governments generally and goodness knows it’s certainly not because local governments aren’t very powerful, influential and effective lobbyists.  It’s that the state has its own obligations and services to fund and they will take priority.  History has proven over and over again that in times of budget deficits and stress, local government supports are the first thing on the chopping block.  And in times of stiff competition for general fund resources in the future, state obligations will win.

For better or worse, like it or not, pressures of “fend for yourself federalism” will trickle down to the lowest levels of government.  Whether we will have done much to prepare for it remains to be seen.