Small towns haven't been gutted by sprawl. They've been gutted because people left to find work. Don't confuse exurban development with what is happening in rural Minnesota. People drive into New Ulm because as you say, the smaller towns have lost a lot of their retail. I don't know how it could be any different given the changes in agriculture.
I'll agree with much of what you wrote. Small towns (let's say <5,000 people) don't often experience sprawl in the same way a major metro does. There may not be as many large-lot non-farm households outside a Tracy, MN as Matt suggests (looking at this
view of the area makes it pretty clear most HHs in the vicinity are farms, again, just using Tracy as an example). It is probably true that Tracy tax base, like most small towns, was hurt quite a bit by losing workers due to ag industrialization. Maybe Tracy could have afforded the roads and parks it has now when every family had at least 1, if not 2, steady jobs (1 at an area farm/town grain elevator(etc) and one in a local store/school/etc).
But that clearly isn't the case anymore. Now, a solid chunk of people drive to Marshall to work. Tracy is lucky in that it has a hospital as a job engine (most small towns like this don't), and an air field (subsidized by the FAA). The high school *is* way out on the edge of town not really connected with the street grid (there was an older one in more traditional form
, not sure if it was destroyed in the big tornado back in the 1968 tornado?). The hospital is as well, just a little better about it. Hwy 14 does have a lot of development that sprung up along it since the 1950s, with some notable new stuff (an Auto Value, a Subway, a Family Dollar soon!). All the while, downtown's storefronts include a city-owned bar/liquor store, a library, a city-run senior center, the municipal building (community center/city offices/etc), and quite a few few empty storefronts. Again, every town isn't exactly the same. But they do sprawl in their own ways, and they did so at a time when they were clearly losing tax base/residents/jobs/etc. Further, of the 622 people who work in Tracy, only 24% live there. Maybe, from a MnDOT perspective, roads like Hwy 14 need focus while counties let the farm-serving roads (of which many are paved, perhaps unnecessarily) go back to gravel.
Tracy received $908k in 2014 LGA. I'm not sure how much help they're getting in any CSAH/MSAS spending. I'd much rather the stat gov't work with towns like this to right-size themselves to make the balance sheets work. Maybe that means spending $908k a year for 10 years buying properties on the fringe off in exchange for more central location. Maybe it means doing some complete streets projects focused on the core. I have no idea what will work for sure. But I just don't think throwing more transpo & LGA money at these slowly dwindling towns is a good use of money just so everyone can drive in & park for free on 45' wide asphalt streets downtown or swim at the really nice community pool that loses $60k/year (just making a number up).
[This is not an indictment of anyone in Tracy, just using it as an example having spent some time there and talking in detail with city leaders]