Aug. 7—Drivers have been suffering through it every time they fuel up their vehicles.

Homeowners are wrestling with it when they need to replace an appliance or finance a repair.

Businesses are struggling under it with each new job opening they have to fill.

They aren't alone. The worst inflation in 40 years is hitting area cities, schools and state agencies as well, and government officials are brainstorming how to maintain traditional service levels without inflicting undue tax increases on already cash-strapped taxpayers.

Tom Sager, director of business services for Mankato Area Public Schools, found himself doing the math in his head when he was out for a walk. The school's current budget assumed traditional cost increases of roughly 3.1%. Inflation over the past 12 months has actually been 9.1%.

"That's a difference of 6 percentage points," Sager said. "In the case of an $8 million supplies budget, that's $480,000 more than we normally would spend."

The district spends roughly $12 million for purchased services — things such as snow removal, legal advice, accounting services, minor building repairs. The difference between cost increases of 3.1% and 9.1% is more than $700,000.

Walking through the numbers

During his not-so-carefree stroll, Sager thought: Well, the vendors are going to absorb some of those cost increases. What if they only pass half of the increase on to their customers?

Even then, the district would be facing about $600,000 in unexpected additional costs for those two pieces of the budget alone — and none of the additional spending would enhance the educational services being provided.

The implications go on and on. The school district has fuel-cost escalators in its contracts with bus companies that require additional payments when the cost of diesel is above $2.30 a gallon. Diesel is about $3 above that threshold right now and was as high as $5.57 a gallon in late June, according to AAA.

"We ended up having to buy close to $150,000 in fuel," Sager said. "(Inflation) will either impact pretty much everything we do or it is impacting pretty much everything we do."

At the city of Mankato, Administrative Services Director Parker Skophammer has literally never seen anything like this. Skophammer was born in 1987 and inflation hasn't been this high since 1981.

"Our vehicle gas and oil is certainly the one that is up the most," Skophammer said. "We're up 47% from where we were last year."

Utility expenditures including electricity and natural gas are 15-20% higher.

And much of the planned construction on streets and municipal buildings is costing more than planned.

"We're seeing increases in costs for all of the projects we're doing," said City Manager Susan Arntz.

For the Minnesota Department of Transportation, the rising cost of construction is obviously a major issue, but so is the increasing expense of purchasing heavy equipment, of buying salt to spread on icy roads, of paying to fill the fuel tanks.

At MnDOT, the assumption for the current fiscal year was that fuel prices would rise 3.5%.

"In reality, it's been closer to 20 percent," said Greg Ous, who oversees operations for MnDOT's Mankato-based District 7, which covers most of south-central and southwestern Minnesota. "We anticipate at least a 15 percent increase for salt compared to last fiscal year. Steel for culverts along with costs for carbide are up around 20 percent."

For the big projects done through bids by private contractors, the agency for years could generally assume the prices would rise a bit more or less than 5% annually.

"But recently we are seeing an increase of around 15-20%," Ous said.

Budget pressure

For cities and counties, now is when proposed 2023 budgets are being crafted by staff. The staff proposals will be handed to elected leaders in the coming days or weeks. Hours of discussions will follow at meetings through the end of summer and during the fall. And after the public is given an opportunity to weigh in, approval of the budgets and accompanying property tax levies must occur in December.

Arntz said it will be a unique challenge for a Mankato City Council that has a long tradition of keeping its levy rate exactly the same as the year before. Under that approach, any property that doesn't see an escalation of its taxable value avoids an increase in its city tax bill. And the approach also means the only enhancement in city property tax revenue is that which comes from new construction or from any hikes by the county assessor in the taxable value of existing properties.

But the council has a second longstanding policy goal of maintaining reserve funds at a level that is equal to 40% of its general fund spending. It's a responsible fiscal approach that invariably gets favorable comments from bond-rating agencies and auditors.

"It's going to be interesting as we look at what the council's desire is for maintaining a 40% fund balance and keeping a flat tax rate," Arntz said.

The city's management will be trying to create a balanced budget that maintains service levels, preserves reserves and doesn't hammer taxpayers — all when inflation is running at 9%.

In some cases, a purchase can be canceled or delayed. In many cases, it can't. If the city wants police officers on patrol, it has to purchase fuel for the gas tank and replacements for worn-out squad cars. If it wants a pothole filled, it has to buy the asphalt. If plows are going to be ready to roll when the next snowstorm hits, spare parts must be purchased and on hand.

"There are certain things we don't have the flexibility to manage, like fuel," said Arntz, who also noted the limited control the city has over medical insurance expenses for municipal workers. "We're bracing for what we're going to hear with health insurance renewal."

The one consolation for Mankato is the city's continued growth, meaning its tax base gets larger and revenues increase even with an unchanged tax rate.

"In June we had a record number of building permits issued — a record in the entire history of the organization," she said of the more than 700 permits.

Amended budgets

Even while cities and counties are preparing for 2023, they're dealing with inflation in their current budgets.

In mid-July, the Mankato City Council passed a resolution amending the 2022 budget to recognize actual expenditures for the wastewater treatment plant. The line item for chemicals was bumped up from less than $500,000 to $636,000; the line for equipment maintenance and repair rose from $205,000 to $362,000; for natural gas it was a $63,000 hike to $191,000.

Arntz said similar amendments might be coming for other parts of the current budget, notably fuel.

At MnDOT, contingencies in budgets allow the agency to adjust to some cost increases. But when everything costs more, one of the unsavory options is to do less.

"We are still assessing the programmatic impacts of this but do expect projects to be delayed if markets stay high," Ous said.

For schools, budgets for the upcoming school year are already locked in. Much of a school district's budget is decided by the state Legislature, which provides most of the revenue for K-12 education and caps the amount of property tax that can be collected.

At its foundation is the state's per-pupil funding formula, and those state tax dollars were set to rise 2% per pupil for the upcoming school year after rising 2.47% the previous year.

The result is a local school budget that will rely on deficit spending for the 2022-23 school year.

"We did identify that our revenues are not going to be able to keep up with our expenses, and we will go into a deficit-spending mode and use some of our fund balances just to maintain existing class sizes throughout the school district," Sager said.

With healthy reserves, the district has that recourse. It's not an option that will be available indefinitely when inflation is at 9% — even higher more recently.

"The last six months, it's been almost 11%," Sager said. "That's going to impact everything we buy, everything we contract out for. Think of food services. ... That rainy day fund, you can only spend that money once."

Paychecks and tax bills

So what is an elected official to do?

As much as local governments are being hit by inflation on goods and services, personnel is still the largest piece of the budget. In a time of tight budgets, employees could be asked to sacrifice. But a pay freeze or a minimal cost-of-living adjustment would be a real-wages pay cut.

That doesn't seem fair if workers have performed their job with dedication, something Arntz said she sees consistently across the city's workforce.

Sager made a similar point.

"We're all experiencing higher gas prices. We pay more at the grocery store. Everything we buy as consumers is costing more. The expectation is: 'We need some help,'" Sager said of the district's workforce. "We'll probably end up updating some of our employment agreements at a rate that's a little bit more."

A larger than usual cost-of-living adjustment isn't solely about fairness or compassion, either. Local government leaders are worried, like most other employers, about attracting and retaining quality employees.

"We're trying to remain competitive," Sager said. ".... People can go a lot of different places with little training and experience and be making $18, $19 an hour. So that's just part of the new landscape of where we are."

City councils and county boards theoretically have a lot of leeway on the revenue side. They can choose to increase the property tax levy by virtually any amount when approving budgets in December. School boards can ask voters to extend or increase operating levies through a referendum.

But elected officials and public sector administrators know that the people paying real estate taxes — the owners of businesses and homes — are grappling with the same inflationary pressures as local governments. A property tax increase on top of the rising costs for food, gas, vehicles, utilities and everything else would be a bitter holiday present.

"We understand it's not just the city's prices that are going up. It's everywhere," Skophammer said. "We're certainly mindful everybody's expenses are increasing whether its food or at the pump."

At this point, the School Board isn't planning to ask taxpayers for additional help through a referendum.

"We don't anticipate doing anything this fall," Sager said. "We're going to have to see what happens in the Legislature next spring. The other thing we're keeping a close eye on is our enrollment. If we get some stabilization on both of those, that will help. But time will tell."