Despite right wing charges of excessive city spending, city expenditures in Minnesota are slightly to significantly below the national average, depending on how expenditures are measured. This conclusion has huge implications in the debate over the appropriate funding level for community investment in the form of city Local Government Aid (LGA).
City spending information used in this analysis is from the most recent “Census of Governments” for fiscal year 2002.* While comparisons of city spending information from state to state are problematic due to differences in expenditure reporting and city functions, the Census of Governments is the most complete and accurate source of city spending information available.
In order to provide a comprehensive examination of city spending, the following analysis is based on four separate definitions of expenditures:
* Total expenditures (referred to simply as “expenditures” in Census Bureau reports) include “all amounts of money paid out by a government… other than for retirement of debt, investment in securities,” etc. Total expenditures do not include internal transfers among city funds.
* Direct expenditures are “payments to employees, suppliers, contractors, beneficiaries, and other final recipients of government payment.” Direct expenditures are the same as total expenditures except that it does not include intergovernmental expenditures.
* Direct general expenditures are the same as direct expenditures except that the following categories are excluded: utility expenditures, liquor store expenditures, and employee retirement and other trust expenditures.
* Current operations are “direct expenditures for compensation of own officers and employees and for supplies, materials, and contractual services except amounts for capital outlay.”
For each of the four types of expenditures described above, the per capita amount for Minnesota cities is substantially below the per capita amount for all U.S. cities. The Minnesota city per capita expenditure is below the comparable amount for all U.S. cities by 20.5 percent for total expenditures, 20.1 percent for direct expenditures, 21.5 percent for direct general expenditure, and 27.6 percent for current operations.
However, this information by itself is misleading. Cities in different states provide different public services. For example, the public school system is operated by cities in approximately twelve states. Cities in these states should have higher per capita expenditures than cities in other states-all other things being equal-because they are providing more public services.
In order to provide a more meaningful comparison between Minnesota cities and cities in other states, it is necessary to adjust the Minnesota and U.S. city expenditures so that expenditures made on services that are not provided by Minnesota cities or provided to a lesser extent are excluded from the totals. Click here for a list of expenditures that are excluded in calculating the “adjusted expenditures” and the reason for their exclusion.
For each of the four categories of expenditures, the excluded categories are subtracted out to determine the corresponding “adjusted” expenditures. These adjusted expenditures will enable a more meaningful comparison between city expenditures in Minnesota and the rest of the nation. The calculation of adjusted current operation expenditures is imprecise due to the fact that current operations cannot be separated from capital outlays for some categories of excluded expenditures.
Figure 1 shows the adjusted total, direct, direct general, and current operation city expenditures per capita. Minnesota cities are 3.7 percent below U.S. cities in adjusted total expenditures per capita and 2.5 percent below in adjusted direct expenditures per capita. The Minnesota per capita adjusted direct general expenditure is only slightly below the national city per capita amount (0.6 percent). However, current operation expenditures per capita for Minnesota cities are 9.4 percent below that of all U.S. cities.
Even if we exclude the current operations category (which, as noted above, is subject to measurement imprecision), per capita spending among Minnesota cities is slightly to significantly below the per capita spending among all U.S. cities, even after excluding expenditures on functions that Minnesota cities do not provide or provide to a lesser extent than in other states.
The fact that city expenditures in Minnesota are less than the national average is noteworthy given that Minnesota cities have to contend with expenses that cities in many other states do not. For example, Minnesota winters create snow removal and road maintenance expenses that are greater than those of cities in most other states. In addition, Minnesota cities must pay the state sales tax; cities in most other states are exempt from the sales tax.
Even more significant is the fact that Minnesota is a high personal income state. Government spending is typically higher in states with high personal income due to the fact that labor costs are higher in high income states than in low income states. (For example, it is generally not possible to hire a policeman or a fire fighter in Connecticut-a high wage state-for the same amount that you would pay in Mississippi-a low wage state.) The ability of Minnesota cities to hold per capita spending below the national average is especially noteworthy given the fact that Minnesota is a high personal income state.
An examination of city expenditures as a percentage of city personal income in the fifty states would probably provide a more meaningful comparison than one based on expenditures per capita. However, income data for cities is not included in the Census of Governments.
Minnesota city spending was not always below the national average. For example, 1987 census data reveals that per capita city spending in Minnesota was modestly above the national average. However, during the next fifteen years expenditures among Minnesota cities grew much less rapidly than city expenditures nationally. The result of this is that by 2002 per capita city expenditures in Minnesota were no longer above the national average.
Figure 2 shows the rate of growth in city expenditures (unadjusted and adjusted) in real (i.e., inflation-adjusted) dollars per capita from 1987 to 2002 for Minnesota cities and for all U.S. cities. The inflation adjustment is based on the implicit price deflator for state and local government purchases. For both types of expenditures, the rate of growth among Minnesota cities was less than one-quarter of the rate of growth for cities nationally.
During the period from 1987 to 2002, the average annual rate of growth in real per capita city expenditures in Minnesota was 0.3 percent. The absence of substantial growth during this fifteen year period is even more noteworthy given the fact that Minnesota cities had a new expense imposed on them during this period in the form of the state sales tax.
Two conclusions emerge from this analysis. First, the 2002 per capita spending of Minnesota cities is slightly to significantly below that of all U.S. cities, depending on how expenditures are measured. Second, the spending of Minnesota cities has grown far less rapidly than that of cities nationally from 1987 to 2002.
Data from non-Census sources indicate that real per capita city revenue in Minnesota has declined since 2002. Additional analysis of trends in city spending in Minnesota versus the rest of the nation will be possible when the 2007 Census of Governments becomes available later this year.
Critics of city LGA argue that the program encourages an unnecessarily high level of city spending. Given that per capita city spending in Minnesota is below the national average, these critics must either abandon their attacks on LGA or establish a new basis for them.
There is probably no one single explanation as to why city spending in Minnesota declined relative to the national average from 1987 to 2002. However, part of the decline is almost certainly due to the decline in real per capita state aid to Minnesota cities and reforms in the manner in which state aid is calculated. These topics will be examined in subsequent Minnesota 2020 research.
*The Census of Governments is published every five years by the U.S. Census Bureau. The 2007 Census of Governments is expected to be published later this year.
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