This week, State Auditor Rebecca Otto released her office’s annual report on city finances. The press release for the report can be found here and the full report can be found here.

The State Auditor’s key finding is that cities are responding to cuts in state funding programs, such as LGA, by relying more and more on property taxes. In fact, between 1999 and 2008, the report notes, revenues derived from property taxes have jumped 37% when adjusted for inflation.

But cities aren’t just increasing property taxes to combat reduced state aid and other economic factors such as declining property values. According to the State Auditor’s report, both city revenues and expenditures have decreased 7% between 1999 and 2008, when adjusted for inflation. This means that cities are spending less than they did 10 years ago, and as costs for items such as fuel, health care, and road maintenance balloon beyond inflation, a city’s dollar today doesn’t stretch as far as it did in 1999.

Moving forward into the 2010 legislative session, LGA and the viability of Minnesota’s communities will be a main topic of debate, to which the State Auditor offered the following caution:

The State is facing a large budget deficit. If the Legislature and Governor further cut local government aids, this will continue the trend of a greater reliance on property taxes,” Auditor Otto said. “I will meet with Legislative leaders to share this very important information for consideration in budget negotiations.