Dayton's Proposed LGA Formula Changes

In January, Minnesota Governor, Mark Dayton, announced his biennial budget proposal for 2014-2015. In the budget proposal, there are a number of components aimed towards reversing the deep cuts in services that has occurred in the recent past. The target is to raise $2.0 billion in new revenues to address the state’s $1.1 billion deficit.  One interesting component to Dayton’s proposed budget is an increase in Local Government Aid (LGA) to cities by $80 million in FY 2015 and an increase in County Program Aid by $40 million in FY 2015.¹

Dayton has also recommended an entirely new formula for calculating LGA. The current formula has been in place since 2003 and was modified in 2008.  The current appropriation for city LGA is $426.4 million. About $26 million of the appropriation is distributed to certain cities, while the remaining $400 million is determined by the current LGA formula.  The current LGA formula pays a percentage of “unmet need” for cities that is based on the difference between 1) measures of the city’s need (depending on population) and 2) the city’s net tax capacity multiplied by an average city tax rate. To mitigate yearly volatility, the LGA program uses data over two years to calculate a city’s aid. Also, there are limits (varying by the size of the city) on the amount that aid to an individual city can increase or decrease in a given year. ²

Much of this current LGA formula would be discarded under the Governor’s proposal. One element that will not change is how a city’s “capacity” is calculated. It will still be the city’s adjusted net tax capacity (tax base) multiplied by the statewide average city tax rate. However, each city’s need would be calculated using an entirely new formula, using three need factors:

•  Public safety/streets need based on population.
•   Percentage of housing built before 1970.
•   Percentage of parcels that are tax-exempt.

Each city would start with a foundation need base of $200 per capita, based on a statistical analysis of the average city spending per capita on public safety and streets. A city will get additional aid above this based on population size, the percentage of housing built pre-1970 times $1.30 (up to $130 per capita), and percentage of parcels that are tax exempt (not city-owned and contains at least one structure) times $65 (up to $130 per capita). ³

The Governor’s main goal with these proposed changes is to enhance stability, by only having one factor (population) that is variable from year-to-year included in the calculation. The new formula would also simplify LGA allocations, by eliminating multiple aid bases (e.g., small cities aid base, jobs aid base, regional center aid base).³

One point of potential controversy with this proposal is that it has been reported that the cities that will benefit the most form the $80 million increase under the new formula, are metropolitan. However, greater Minnesota cities do and still will receive more LGA per capita than metropolitan areas.⁴  (See House Research graph: http://www.house.leg.state.mn.us/hrd/issinfo/ShareLGA.pdf)

Some points for debate or further research over this new proposal include: is the new formula fair? Why should Minnesota switch to a formula that favors metropolitan cities? What implications will this increase in LGA have for service delivery?

1. http://minnesotabudgetbites.org/2013/01/31/governor-daytons-budget-proposal-part-2-tax-reform/#.USUdS6U5tUQ

2. http://www.house.leg.state.mn.us/hrd/pubs/ss/ssnewlga.pdf

3. http://www.lmc.org/page/1/lgareform-proposal.jsp

4. http://www.tcdailyplanet.net/news/2013/02/06/governors-local-government-aid-proposal-impact-city