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