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Duluth's budget bolstered 10 years after global crash

In the decade since a wrecking ball struck the global economy, Duluth's city finances have rebounded. Reserves have swelled, retiree health care is relatively under control and revenue has consistently beat forecasts.

So, when the next economic downturn arrives, Duluth's budget should be able to cushion the fall — even if the state slashes Local Government Aid payments again.

"We are dependent on it, though we wouldn't like to be," said Wayne Parson, Duluth's chief financial officer.

More than a third of the city's general fund revenue comes from the state, which proved a precarious position in 2008, when that funding was cut and the city had to send its budget reserves into the red for the first time in its history.

Back then, reserves had already been falling for several years and in 2007 dipped to $1 million — well below the minimum required by city policy. So, when the state came up short, the city did, too.

If the state made the same cut today in response to a recession increasing spending on social services, or lower tax collections, or fewer federal dollars to dole out, it probably wouldn't cause the same crisis.

"We've gone from $1 million in the hole to $15 million (in the black) today," Parson said of the city's reserves, though the most recent budget slightly overstated those reserves compared to the numbers listed on year-end financial reports.

Still, Duluth has squirreled away more than 16 percent of the overall general fund, which is precisely what the Government Finance Officers Association recommends as the minimum any government should carry at all times. The reserves are also above the 5 to 10 percent city policy requires, and Parson said he will be pitching the city council on raising that minimum early next year.

Otherwise, that money might start to look a little tempting as councilors start thinking about re-election campaigns.

"In all cases, use of those funds should be prohibited as a funding source for ongoing recurring expenditures," the Government Finance Officers Association says.

Health care creeping up

If Duluth has the reserves to handle a recession — rating agencies tend to think so — then the next biggest threat to city finances is the rising cost of health care.

Duluth has tucked away about a third of the money it has promised current and future retirees. That seems low, but it's far better than most other cities and states. In 2015, Minnesota had no money stashed away to cover the nearly $1 billion in health care costs it has promised retirees, according to Pew Charitable Trusts, meaning those ballooning costs must be built into yearly budgets, potentially crowding out other priorities.

In Duluth, taxpayers are covering up to $9 million per year in order to keep the retiree health care fund from being depleted. For now, Parson said, that means promises will be kept and the money will be there indefinitely.

"We're held up as a success story," he said. "We were able to get some reforms in place," such as consolidating health plans and saving money by buying Medicare supplements for those 65 and older.

Still, this is another place where more Local Government Aid would be helpful, Parson said, since health care costs have skyrocketed but that single-largest chunk of revenue has remained stagnant. And there are plenty of other things residents might want their $9 million spent on.

If LGA had kept pace with inflation, it would be more than $35 million today. Instead it's around $30 million, right where it was 10 years ago.

Though there have been proposals to tie Local Government Aid to inflation and otherwise shore up the money that many cities are heavily dependent on, the biggest changes have come in funding cuts in 2003 and formula changes in 2013.

"Without regular increases in statewide aid, local property taxpayers shoulder more of the burden," said state Sen. Erik. Simonson, DFL-Duluth. "Restoring to pre-2003 levels and tying future funding to both inflation and the state budget status has wide support across all of Minnesota."

Rep. Jennifer Schultz, who sits on the House Taxes Committee, agreed.

"Tying Local Government Aid to inflation or a similar measure would give Duluth fiscal peace of mind," she said. "Citizens should be able to count on essential city services and infrastructure without unfair, regressive property tax hikes, and LGA has been an effective component to Duluth's ability to deliver these."

With or without any state changes, Duluth is exploring a new priority-based approach to budgeting that could help councilors and city departments pull levers when times get tough.

"We're trying to understand our programs, what they cost, whether it's a mandated thing, how much it costs, why we're spending so much money doing this," Parson said. "In a worst-case scenario, if we have to cut $10 million from the budget, where do we look? This gives us a tool."

Duluth general fund budget reserves

2006 — $3.5 million

2007 — $1 million

2008 — -$1.3 million

2009 — $1.7 million

2010 — $5.3 million

2011 — $7.7 million

2012 — $7.6 million

2013 — $7.7 million

2014 — $9.3 million

2015 — $11.6 million

2016 — $11.6 million

2017 — $13.2 million

2018 — $15 million (projected)

Source: City of Duluth budgets and consolidated annual financial reports

Brooks Johnson

Brooks is an investigative/enterprise reporter and business columnist at the Duluth News Tribune.

(218) 723-5329