Thinking of Reforming Minnesota's LGA? Might want to take a look at our neighbors

Local Government Aid is a Minnesotan state aid to local governments, which provides unrestricted funding. Throughout the current Minnesota Legislative session some legislators have proposed reforming LGA by changing its distribution formula. Other legislators seek to reduce the amount of aid allocated (see HF 42).

Minnesota politicians love comparing The Land of 10,000 Lake's policies with that of its neighbors, and luckily many other Midwestern states also have state aid programs similar to LGA. What lessons can be learned from Wisconsin and Illinois?

Wisconsin

Wisconsin has a similar state aid program that was reformed in 2004 called the Shared Revenue Program. This state aid provides funding to both municipalities and counties, with almost 80% of the allocations going to municipalities. In 2010 $889.1 million was distributed. In the current Wisconsin legislative session, a proposed budget bill, SB 27/AB 40, reduces the amount of funding for the program by $96 million.

Similarly to Minnesota's LGA the original purpose of the program was to assist local governments with limited financial means so that they could provide a minimum level of services. The program before 2004 had a distribution formula based on need, but the reforms of 2004 eliminated the formula. Now the Shared Revenue Program distributes a sum based on the 2003 amount, in effect removing the ability to modify funding as local government need changes. As a result, its current distribution is less effective at helping needy local governments whose needs have changed since 2003.

Lesson for Minnesota: reforms don't always improve programs. If a reform of the formula is undertaken, make sure it continue to aligns with the purpose of LGA.

Illinois

Illinois's equivalent to LGA is the Local Government Distributive Fund (LGDF), which provided $1.22 billion in state aid to counties and municipalities in FY 2009. The LGDF has a revenue source specifically earmarked for the program, with 10% of net revenue from state income taxes allocated to the program. The funding is divided up to municipalities and counties on a per capita basis, with counties collecting funding based on the county population minus any individuals located in a municipality in the county. For example, Chicago's residents would be excluded from Cook County's population amount.

The LGDF program is more simplistic in its formula and reaches all Illinois residents, increasing its political viability because it helps all Illinois local governments. At the same time, it doesn't target needy local governments like Minnesota's LGA. Additionally, having a dedicated funding stream ensures the expenditure is not reliant on General Funds. This partially insulates it from state budget deficits, although it is not always the case: the governor of Illinois proposed to reduce the net percentage of revenues LGDF receives from 10% to 7%.

Lesson for Minnesota: in order to ensure stability for future LGA funding a dedicated revenue stream from a certain type of tax collection might be prudent, although it does not guarantee safety in times of large budget deficits.