Minnesota’s top financial officer says uncertainty surrounding federal funding and the economic effects of immigration enforcement activity could soon create financial challenges for cities across the state.
Julie Blaha, the state auditor, said in an interview that federal policy shifts and the recent surge of immigration enforcement agents in Minnesota are already creating ripple effects for local governments.
Blaha’s comments came alongside the release of the 2023 Minnesota City Finances Report, which examines trends in city revenues, spending, and debt across the state.
“Property taxes remain the foundation of city finances,” Blaha said when the report was released. “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 found that total governmental fund revenues for Minnesota cities reached $7.9 billion in 2023, a 13.9% increase compared to 2022. Meanwhile, expenditures rose to $8.3 billion, an increase of about 7%.
Blaha said the relative stability in recent local budgets has been supported by federal and state funding keeping pace with rising costs.
“As costs were rising, state and federal grants were keeping pace,” she said. “That’s been a big reason things have remained pretty stable at the local government level.”
Still, she warned that stability may not continue if federal funding becomes unpredictable. Blaha expressed concern that actions taken by President Donald Trump’s administration could alter the funding landscape for states like 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,” 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 say the action is part of a broader nationwide effort to crack down on fraud in federal programs. Vice President JD Vance said the administration is focused on ensuring taxpayer funds are not misused.
“Far too many people have gotten rich off programs meant to serve children and vulnerable Americans,” Vance said.
The withheld funds represent roughly 7% of Minnesota’s quarterly Medicaid funding. State officials warn that even temporary losses could force service reductions or require lawmakers to shift funding from other areas of the budget.
Blaha said federal policy decisions often ripple down to local communities. She pointed to potential cuts to programs such as the Supplemental Nutrition Assistance Program and Medicaid as examples of policies that can impact local economies.
“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.”
Minnesota communities are also dealing with the aftermath of Operation Metro Surge, a large federal immigration enforcement effort that deployed thousands of agents to the state earlier this year.
Though the operation has officially ended, enforcement activity continues. During the peak of the operation, Minnesota’s largest cities saw nearly constant public demonstrations as thousands of federal officers were assigned to the area. The protests intensified following the January deaths of Alex Pretti and Renee Good.
Blaha said the enforcement surge has already created financial and economic ripple effects in Minnesota communities.
“All of that chaos together does hit local governments,” she said, adding that her office has already begun hearing anecdotal reports about the impact.
Officials say the operation disrupted local economies, with some businesses temporarily closing and some communities reporting drops in school enrollment. After the operation ended in February, Minneapolis sought federal financial assistance to help address the economic fallout.
City officials estimated that Minneapolis alone experienced a $203.1 million hit to the local economy in January. That included $47 million in lost wages, $81 million in lost revenue for restaurants and small businesses, and $4.7 million in hotel cancellations.
Blaha said local governments are particularly vulnerable to financial shocks because they rely heavily on property taxes and have limited flexibility in their budgets.
“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.”
She added that much of local government spending goes toward essential services such as public safety, road maintenance, 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 interconnected 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.”
“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.”
