Shutdown Leads to Cuts in Staff and Services, Higher Property Taxes for Local Governments

The city of Mankato provides a snapshot of the economic reality many local governments statewide can expect to confront over the next few years–and it isn’t pretty. The projected deficits facing Mankato due to the financial fallout from Gov. Walz’s  prolonged COVID-19 shutdown look so daunting the city council met in person for the first time since March to discuss the anticipated impact on the city budget, services and taxpayers. One of the realities is that city employees will take a hit, according to the damage estimate in the Mankato Free Press.

The proposed reorganization plan developed by Hentges and Zelms would cut $2.3 million from the $35.6 million paid by the city in salaries and benefits, mainly by reducing 18 positions through “flattening the supervisory structure,” not filling currently vacant positions, possibly offering early retirement packages, and, if necessary, layoffs.

“We are lean, but we’ll be a lot leaner,” Hentges said.

Unpaid time off of three to five days is proposed for 2020, although existing labor union contracts may mean that only nonunion municipal employees face those immediate furloughs. But a week or two of forced unpaid time-off is proposed for 2021, something that would be negotiated with union leaders. The financial hit for a city employee earning $50,000 a year would $1,260 for each week of furlough required.

The consensus? The local impact will be greater and last longer than the Great Recession, partly due to less financial help coming from the state and feds than in 2008.

With the worst yet to come in 2021 and 2022, residents are likely to see rising property taxes, utility rate increases and a decline in the city workforce, according to Mankato municipal leaders…

So with local governments largely on their own, the City Council’s response will likely have to include staff reductions, unpaid furloughs for remaining employees, the spending-down of most reserve funds, reductions in some city services, delays in new municipal amenities and property tax increases.

The anticipated decline in revenue hits virtually every city-operated venue and activity that the regional hub relies on for income. The shutdown slammed the door on the economic and social activity that generates millions of dollars annually for city coffers.

Revenue from the local sales tax inevitably plunged as retail stores were shuttered for three months. Lodging taxes and the half-percent food, beverage and entertainment tax largely disappeared as hotels sat empty and bars and restaurants closed for in-person dining for the entire spring and are now operating at a fraction of traditional sales.

And income from concerts, conventions, hockey games, wedding receptions, and festivals dried up at city-owned facilities such as the civic center and Vetter Stone Amphitheater.

But even revenue sources that traditionally are more recession-proof — such as property taxes and utility bills — are expected to be negatively affected.

Residential property tax increases always remain an option to back fill the hole in the budget–up to a point.

The political reality, though, is that a big reduction in taxes paid by commercial properties would mean a painful shift in the tax burden to homeowners — something that could be politically unpalatable for elected officials.

Which is part of the reason the city’s management team is looking at cutting staff and expenses and partially depleting reserve funds as the primary strategy for getting through the rest of this year and the on-going fiscal troubles in 2021 and 2022.

Mankato elected officials realize the political backlash from hiking property taxes could cost them at the ballot box. So for the foreseeable  future it appears local governments may be forced to do as much or more with less.