How are municipalities in Minnesota coping with cuts to LGA?

By John Briel

Before expounding on my proposed question, I would like to provide some historical background information on Minnesota’s Local Government Aid (LGA) program. LGA was enacted in 1967 as means for addressing intense growth pressures facing local jurisdictions and the potential for concomitant fiscal disparities. Prior to 1967 Minnesota municipalities relied heavily on property taxes to fund services. As rapid growth, fueled by government policies favoring suburban-style development, increased demand for services in suburban communities and hollowed out the urban cores, both urban and non-urban municipalities began to look for other revenue vehicles for lessening their dependence on property tax. In response to state-wide concerns that such areaction would lead to a dramatic disparity amongst affluent and stressed communities, the legislature created the LGA program. 

The recent recession has significantly impacted the amount of LGA funds available to Minnesota’s municipalities. Additionally, in 2003, sweeping legislative changes during the Pawlenty administration removed the yearly inflation index adjustment and instituted a major overhaul of the LGA formula. In this year alone, the state reduced LGA funding by 25 percent from the previous year. Since 2002, there has been an increasing politicization of LGA funding decisions, particularly given our decades-long aversion to raising taxes. The current poliitcal stance, in the Democratic controlled legislature, is to preserve current allocation levels as opposed to making further cuts. To briefly provide some context on how LGA funds have been reduced, in 2002 the inflation adjusted payout was $775 million while in 2010 the state paid $426 million. 

These cuts have challenged Minnesota municipalities to either cut services or find other revenue streams for maintaining critical services like education, fire, and safety. For many municipalities state aid is the second largest revenue source; it is even the primary source for a few. In the Twin Cities metro area, over 60 percent of municipalities have stopped receiving LGA funding entirely. 

So what are municipalities doing to make up for this reduced or lost revenue? It’s a different story depending on the jurisdiction's socioeconomic composition. In more affluent Excelsior, administrators initially raised taxes to cover the $130,000 revenue loss and now no longer include LGA funds in the budgets. The community is able to comfortably shoulder the cost of services. Other municipalities with comparable resources and amenities are finding additional revenue through an array of fee and service charges like rental for city property, public safety contracts, and recreation fees for golf and pool services. Generally, these fees account for roughly 10 to 15 percent of municipal  revenues. 

In stark contrast less affluent municipalities with a reliance on a singular revenue stream are transfer costs onto homeowners in the form of increased property taxes. For instance, the City of Richfield, increased its property taxes seven percent in both 2010 and 2011, then four percent in 2012. Out-state communities, the most heavily reliant on state aid, are cutting services, deferring maintenance and raising property taxes. This burden is financially crushing for citizens living in these lower wage communities that are oftentimes more susceptible to the negative effects of the economic cycle.  

In order to mitigate this growing disparity among the haves and have-nots, the maintenance and availability of adequate and relevant services for critical needs (like education) should be considered a priority for both the state and all municipalities in Minnesota. While a majority of municipal leaders and their citizens tend to focus solely on themselves, probably due to resource constraints, it would behoove them to look across their contrived borders at what's happening regionally.  In the long-term, the inadequacy of services in another community could negatively impact their own quality of life and the state's economic competitiveness.

A fun source: For those interested in learning about state aid in their community,  please click on this link to an interactive map.