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Intergovernmental Aid and Political Footballs in MN

This is a guest post, originally posted by Jim at the Course Weblog of PA5113: 
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Local Government Aid (LGA) is a longstanding Minnesota intergovernmental transfer intended to assure all residents of the state of their local government’s ability to provide core public services with a reasonable property tax assessment across the wide diversity of property poor and rich communities in the state. It serves an additional progressive taxation function of reducing property tax needs of local governments by substituting revenues derived from in part from progressive income tax collections for more regressive property taxes. Currently 763 cities across the state receive LGA payments .

The LGA program for FY 2009 was set by the 2008 legislature at $526.1 million. That was an increase of $42 million. That increase in LGA was part of a political compromise that included the reimposition after a several year absence of levy limits on local governments. These limits cap annual property tax increases at no more than 3.9% plus calculations of population and commercial/industrial tax base growth in the jurisdiction. A number of exceptions to levy limits allowing for greater property tax increases than allowable under the levy limit formula were also included.

The formula for distributing that aid to large cities with populations of over 2,500 is remarkably complex with a large number of factors. It measures need-the population, rate of population decrease, number of housing units built before 1940, and the percentage of its tax base that is commercial and industrial property, number of auto accidents along with a new measure added in 2008 of job base, intended to capture those large metropolitan area cities and regional centers that act as the job center for the surrounding area-against the government’s ability to raise sufficient revenues from its local tax base multiplied by the average tax rate in the states. The difference between the formula for the need and the formula for the ability to pay is intended to be met by state aid.

In December of 2008, at the end of local governments fiscal year but the mid-point of the state’s Governor Pawlenty “unallotted”, or cancelled $53.5 million of aid to cities to bring Minnesota’s immediate budget deficit in FY 2009 of $453 million into balance. His 2010-2011 budget proposal includes cutting LGA 77.8 million in FY 2010, a 14.7% cut and by an additional $168 million or 31.1% cut in FY 2011 .

The unallotment, coupled with the proposed LGA cuts has provoked a backlash from local communities across the state. Local communities along with public sector employee unions have created a website thanklga.org with stories and photos illustrating the impact of LGA on local communities. Think tanks such as MN2020 and Growth and Justice have done additional research on the impact of LGA cuts. This issue is one that should provide plenty of fireworks before the final budget is settled.

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Hubert H. Humphrey Institute of Public Affairs