(The Center Square) – Minnesota’s top financial officer says uncertainty in federal funding and the economic ripple effects of Operation Metro Surge are already affecting local governments across the state.
Julie Blaha, the state auditor, told The Center Square in an exclusive interview that federal policy changes and the recent surge of immigration enforcement agents in the state could create financial challenges for cities.
Blaha’s comments come alongside the release of the 2023 Minnesota City Finances Report, which summarizes trends in city revenues, expenditures and debt across the state.
“Property taxes remain the foundation of city finances,” Blaha said upon the report’s release last week. “But federal grants are up 186.5% since 2014 and have played a significant role in shaping local budgets, so careful planning is essential for sustainability.”
The report showed total governmental fund revenues for Minnesota cities reached $7.9 billion in 2023, a 13.9% increase from 2022, while expenditures rose to $8.3 billion, up 7%.
Blaha warned that stability in local budgets could be threatened if federal funding becomes less predictable.
“As costs were rising, state and federal grants were keeping pace,” she told The Center Square. “That’s been a big reason things have remained pretty stable at the local government level.”
That stability is not guaranteed, she said, expressing concern that actions by second-term Republican President Donald Trump could disrupt the trend. She pointed to potential cuts to federal programs and broader economic policies affecting Minnesota.
“I worry with what President Trump has been doing with federal funding over the last year that we’re going to see a shift, a big shift, especially in Minnesota, where we have been a target of some of his economic attacks – and that has made a lot of that funding volatile,” Blaha said. “I worry that Trump is really rocking the boat here, and I’m worried because we’re starting to take on water.”
State officials recently filed a lawsuit after the federal government moved to withhold roughly $243 million in Medicaid payments while reviewing potential fraud-related compliance issues.
Minnesota Attorney General Keith Ellison accused federal officials of attempting to cut funding before completing a formal review.
“The Trump administration’s M.O. is to cut first and ask questions later,” Ellison said.
Federal officials have framed the move as part of a nationwide effort to declare a “war on fraud.” Vice President J.D. Vance said the administration would not allow Medicaid dollars to be misused.
“Far too many people have gotten rich off programs meant to serve children and vulnerable Americans,” Vance said.
The withheld funds represent about 7% of Minnesota’s quarterly Medicaid funding, according to state officials, who warn that even temporary losses could force service reductions or require lawmakers to redirect funds from other areas of the state budget.
Blaha told The Center Square that cuts in programs such as the Supplemental Nutrition Assistance Program and Medicaid are examples of how federal decisions can cascade down to local governments and communities.
“When you’re cutting off SNAP benefits, it’s local food banks that feel that impact,” Blaha said. “It’s your local grocery stores where their customer base falls off, and that affects property tax collections.”
At the same time, the state is still dealing with the effects of a large federal immigration enforcement operation. Though Operation Metro Surge has officially ended, immigration enforcement activity is ongoing.
During the peak of the operation, Minnesota’s largest cities faced nearly constant public protests as thousands of federal officers were assigned to the area. The protests intensified after the January deaths of Alex Pretti and Renee Good.
Blaha said the enforcement surge has already created economic and financial ripple effects in Minnesota communities.
“All of that chaos together does hit local governments,” she said, adding her office is already seeing it “anecdotally.”
Minnesota officials have linked the operation to disruptions in local economies, with businesses closing temporarily and some communities reporting drops in school enrollment. After its end was announced in February, Minneapolis sought financial assistance from the federal government to address the surge’s impacts.
According to officials, the city reported a $203.1 million hit on the local economy in January alone. That includes $47 million was lost in wages, $81 million was lost in revenue to restaurants and small businesses, and another $4.7 million was lost in hotel cancellations.
Blaha said local governments are particularly vulnerable to financial and economic shocks, as well as cuts to federal funding.
“It’s like pushing on a balloon,” she said. “If federal or state funding drops, they have to make it up locally, and that’s primarily property taxes.”
Local governments also have limited flexibility in their budgets because much of their spending goes toward essential services such as public safety, roads and emergency response.
“You can’t just say you’re not going to respond to fire calls this year,” Blaha said. “If streets are falling apart, you’ve got to fix them.”
Blaha said the situation highlights how closely tied federal, state and local finances are.
“These systems are deeply interconnected,” she said. “Every level needs to understand what every other level is doing. If you’re a state legislator, you need to know what’s happening at the federal level, because it affects the state and it affects your local communities.”
Blaha noted that disruptions at one level of government will ripple through the others, eventually having a real impact on people’s lives.
“When local government is working well, you’re not thinking about it,” Blaha added. “The water turns on, the ambulance comes when you need it, the roads get fixed. When local government is disrupted, your daily life is disrupted almost immediately.”
