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MN2020 - Map: How Much Funding is Your City Receiving?
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Map: How Much Funding is Your City Receiving?

September 30, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Before the governor and legislature could bring property tax relief to Minnesotans, all of the major players—many with competing interests—had to compromise on how to do it fairly, agreeing to reforms that would make the city Local Government Aid (LGA) formula less volatile, less complicated, and better targeted to cities in greatest need of state assistance.

As part of the plan, Governor Dayton proposed an $80 million (19 percent) increase in city LGA funding beginning in 2014. 

Under the leadership of House Property Tax Division Chair Jim Davnie of Minneapolis and LGA reform bill chief author Rep. Ben Lien of Moorhead, an LGA working group consisting of the state’s three largest city organizations—the League of Minnesota Cities (LMC), the Coalition of Greater Minnesota Cities (CGMC), and the Association of Metropolitan Municipalities (AMM)—began meeting in February to hammer out an agreement that would be the framework for a new and improved LGA formula.


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The path to agreement was not obvious. As noted in the first part of this series, the total LGA appropriation declined sharply from 2002 to 2013, with most cities in the state losing aid. Cities were understandably eager—if not desperate—to restore some portion of that aid in order to fund city services and reduce property taxes. However, the loss in aid among cities was not uniform. Cities in the seven county metropolitan area* generally lost more aid than greater Minnesota cities largely because of the methodology adopted by the legislature for apportioning LGA reductions among cities.† From 2002 to 2013 the size of the LGA appropriation had not only contracted dramatically, but the share of the shrinking LGA pie going to cities in the seven county metropolitan area had fallen from 42 percent to 31 percent; the number of metro cities receiving no LGA at all had grown from 11 in 2002 to 89 in 2013.

Most students of LGA are not troubled by the fact that more LGA per capita goes to greater Minnesota cities than to metropolitan cities. After all, greater Minnesota generally have significantly smaller tax base per capita than metro cities and thus can generate less revenue locally and consequently have a greater need for state aid. However, many metro communities believed that over time the aid distribution had become too lopsided in favor of greater Minnesota and did not recognize the needs of many metro cities. The AMM, representing most of the cities in the seven county metro area, wanted a formula that did a better job of recognizing the expenditure need of metropolitan cities and that would send an increased share of LGA dollars to metro suburbs.

The CGMC, representing primarily regional and sub-regional centers in greater Minnesota, did not dispute the fact that an increased share of the total LGA appropriation should go to cities in the metro area—but how much greater? Finding a satisfactory answer was at the crux of the LGA controversy. Meanwhile, the LMC—as the sole organization representing all (or nearly all) cities—had to not only navigate differences between metropolitan and greater Minnesota cities, but also attempt to represent the legitimate concerns of hundreds of small cities that were not members of either the AMM or CGMC.

How were these differences ultimately resolved? While each of the groups participating in the LGA working group had particular goals, each also recognized the need to adopt formula changes that passed the good public policy “smell test” by directing aid to cities based on their legitimate need for state assistance and that did not disproportionately benefit one region of the state or one group of cities at the expense of others. Only a proposal that met these criteria would have a chance of getting the support of the Governor and a majority of both houses of the legislature. The need to increase LGA funding and to maintain the viability of the LGA program gave city organizations a powerful incentive to compromise and in the end that is precisely what they did.

In 2014, the agreement that the LGA working group crafted will send approximately half of the $80 million appropriation increase to cities in the metropolitan area, with the remaining half going to greater Minnesota cities. Future aid increases after 2014 under the new formula will also be fairly evenly divided between greater Minnesota and metro cities. Over time, the total share of LGA dollars going to metropolitan cities will gradually move toward the percentage that they received in 2002, assuming at least some increase in the LGA appropriation in future years. Finally, the number of metropolitan cities receiving LGA will increase from 51 in 2013 to 83 in 2014.

The map above shows 2013 LGA for each Minnesota city under the old law, 2014 LGA after the reforms adopted by the legislature in 2013, and the per capita aid increase from 2013 to 2014. Click here for a printout showing similar information for all Minnesota cities listed alphabetically.

The compromise formula designed by the LGA working group and ultimately adopted by the legislature was a triumph not simply because it satisfied the goals of specific cities and city organizations, but because it produced an aid distribution that was simpler, less volatile, and better targeted to cities with the greatest need for state assistance. The specific changes to LGA that made this outcome possible are described in the final installment of this series.

 

*As used here, the terms “metropolitan cities” and “metro cities” will refer to cities in the “seven county metropolitan area,” which includes the counties of Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington.

†Over the last quarter century, most reductions to the LGA appropriation were enacted after aid payments to cities were certified (i.e., after cities were officially notified of the amount of aid that they would receive in the upcoming year) but before the aid was actually delivered. These LGA reductions were generally apportioned by reducing the aid of each city by a uniform percentage of each city’s total levy plus state aid. Because the levy plus state aid per capita of Minneapolis and Saint Paul is significantly higher than the statewide average, these two cities saw much larger per capita aid cuts than most other cities. Meanwhile, aid reductions were sufficient to completely wipe out the LGA of many metro suburbs that typically received relatively low amounts of LGA per capita to begin with due to their relatively high tax bases. These factors combined to produce larger percentage and per capita LGA cuts within the metropolitan area.
 

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