CHICAGO — Faced with declining state aid, Minnesota counties are relying more heavily on property taxes and spending more than they collect in revenue, leading to increased draw-downs on their unreserved balances, a state auditor’s report found.

The report released this week by auditor Rebecca Otto reviews the 2008 financial data of the state’s 87 counties and tracks long-term trends over the last decade. Over the last seven years, counties collectively relied more heavily on property tax revenue, with a 7.2% increase between 2007 and 2008. A similar trend was noted in Otto’s report on Minnesota city finances earlier this year.

Unreserved fund balances — watched closely by rating agency analysts as a barometer of a government’s fiscal health — steadily began declining in the three years leading up to 2008, when they hit a 10-year low.

County revenues in 2008 totaled $5.6 billion, up by 2.7% over 2007, mostly due to an increase in tax revenue, while expenditures totaled $6.2 billion, a 6.4% increase over the previous year. With revenue failing to keep pace with expenditures, counties saw a dip in their unreserved budget balances to 41% of expenditures from 43.8% in 2007. The level is still healthy by Government Finance Officers Association standards, but the negative trend worries Otto.

“This is not a sustainable path for county governments,” the auditor said in a statement. “The Legislature needs to proceed cautiously in the final budget bills when it comes to cuts for our counties, as they will have less reserves to dip into.”

Outstanding debt issued by counties totaled $3.2 billion in 2008, up 12% over the previous year, but that was due primarily to Hennepin County’s borrowing to fund a new stadium for Major League Baseball;’s Minnesota Twins. Over the last decade, counties’ debt rose 67.7%.

As the state has grappled with declining revenues, it has cut aid to local governments. A supplemental bill approved by lawmakers last month trimmed $105 million from aid to cities and counties, down from a cut of $250 million proposed by Gov. Tim Pawlenty to chip away at a $1 billion deficit in the current $57 billion fiscal 2010-2011 budget. Those cuts come on top of what the League of Minnesota Cities said has been a $258 million drop in state aid to local government units since late 2008.

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