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Minnesota's city aid discussion dominated by cuts, confusion, criticism

Cuts made to Local Government Aid by the legislature are causing confusion across the state.
REUTERS/Andy King
Cuts made to Local Government Aid by the Legislature are causing confusion across the state.

Two legislative staff members had just presented a long, complex explanation of how Local Government Aid is distributed to cities across Minnesota. The Dec. 7 meeting was just the second ever for a study group created three years ago to improve the LGA system that many city officials would decry as unfair — if they understood it well enough to be certain.

After the lengthy presentation, Roseau Mayor Jeff Pelowski sat back in his chair with a new appreciation for his staff members.

"I felt uncomfortable asking my staff why we lost [LGA funds] when they replied, 'I don't know,' " Pelowski said. "Now I know they weren't pulling my leg."

Pelowski doesn't know either, even though he's a member of the study group. And he's not alone.

A MinnPost survey of more than 30 city officials found that as the state sends fewer dollars to cities, questions mount about the fairness of the system. Those questions are sometimes left unanswered by a complex formula that many city officials don't understand.

In interviews with city and state officials, as well as associations representing Minnesota cities, MinnPost found:

  • Nearly two-thirds of the cities surveyed said they would — or were likely to — reduce services because of their LGA allocation.
  • More than half said they will — or are likely to — increase taxes or fees because of their allocation.
  • About half said they had concerns about how the LGA formula is crafted.
  • Many said that uncertainty in LGA funding hinders their budget-planning process.
  • Officials commonly say the complex distribution formula raises questions about the program's fairness.
  • The group of state legislators, city leaders and policy analysts will meet again Tuesday to review the LGA formula.

Though the group's previous efforts have been meager, some say real reform this time is critical.

"Frankly, with LGA, most city council members, most legislators around the state of Minnesota, do not understand the formula and cannot articulate the answers to questions related to LGA," said Senate Majority Leader David Senjem, R-Rochester, a member of the study group. "And in that sense I think it needs to be changed."

Huge cuts to cities have only fueled the call for change. In the meantime, they've forced cities to get creative.

Cities struggle with state aid cuts
Baudette, along the Canadian border, is home to miles of scenic trails and park space. In order to continue to fund those amenities, the city built a campground in the city park. The new campground, which includes 21 spaces for RVs, has brought in about $20,000 in its first two years.

But that additional revenue won't be enough to avoid budget cuts. The city of 1,100 will eliminate a full-time police position after cutting a lineman in its electrical department last year.

The city of Ely hopes to begin issuing passports, which officials hope will generate an additional $10,000 in revenue per year.

Avon, meanwhile, is soliciting private donations to make some much-needed improvements to its beach, parks and sidewalks.

Some cities are looking at sharing services and equipment.

Little Canada, for instance, shares software and facility use with several cities. It also shares a building official and recently bought a street sweeper with Falcon Heights.

Cities across the state have dealt with LGA cuts in similar ways, including such traditional, but politically unpopular, routes as property tax increases and service cuts. Some don't replace retired employees or instead hire part-timers.

For smaller cities like Bagley, it wasn't feasible to reduce its two-man street department. Instead, in 2012, the city will cut overtime hours, and there will be less travel for training.

Facing a $12 million loss of expected LGA funds, the St. Paul City Council recently passed a 5 percent property tax increase. The city passed $6.2 million in cuts, with $2.9 million coming from the fire and police departments.

"We've run out of places to cut, and we try to balance out our cuts with revenue increases, i.e. property taxes, but the balancing point is not as easy to find," Mayor Chris Coleman said.

Some believe it's past time that cities become less dependent on Local Government A.id.

"I just see LGA has been a crutch," said Rep. Linda Runbeck, R-Circle Pines, co-chair of the LGA study group. "And all it's done is to make it easy to increase expenditures when they can."

Last legislative session, Runbeck proposed eliminating LGA for Minneapolis, St. Paul and Duluth by 2015. The proposal also would have reduced the amount to metro suburbs.

City officials say they need the money for necessary services. And they add that it's become hard to plan for whatever amounts they do get.

Because the state and cities are on different budgetary schedules, cities have been unable to predict how much LGA money they'll receive by the time they set their budgets.

This time, for example, the state held LGA payments to 2010 levels when it passed the tax bill in July. That meant many cities faced a mid-year cut from the certified LGA amount scheduled when they adopted their current budgets.

To compensate for the uncertainty, several cities surveyed said they craft contingency budgets in case they don't receive full funding.

"The lack of certainty regarding LGA can be an impediment to long-range budget planning, unless a city wishes to try and create a budget that does not rely upon LGA," Alexandria City Administrator Jim Taddei wrote in response to a MinnPost survey question.

Cities will have to deal with even less LGA in the future. Beginning in 2013, the state will pay $101 million less to cities.

Source: House Research–Senate Counsel & Research

Complexities baffle city leaders
Waverly Mayor Connie Holmes
was perplexed after her city's certified LGA allocation was cut from more than $52,000 to just $666 this year. It was the largest percentage cut to any city this year.

She's discussed LGA with legislators numerous times and studied the program herself, but answers are hard to come by.

"LGA is one of the most inoperable and complicated systems," Holmes said.

The state distributes the money using a formula based in part on a city's need and ability to pay for basic services.

That formula has gone through several changes and grown increasingly complex since the program was enacted in 1971 as part of a series of tax reforms commonly known as the "Minnesota Miracle." That effort reform was intended in part to curb property taxes and level the playing field between rich and poor areas of the state.

When the state Legislature cut the LGA program in 2003 in dealing with a state deficit, it also changed it significantly. One of the biggest changes put more weight on the distribution formula, and a city's need became a greater determinant in its LGA allocation.

But some say the variables that the state uses don't always properly measure need.

The formula for cities with populations of more than 2,500 uses many different variables — such as percentage of houses that were built before 1940, population and average household size — to compute LGA.

It also uses several variables that city leaders see as questionable, such as traffic accidents per capita. That traffic factor is supposed to measure visitors coming into the city.

In some instances, cities that lack certain characteristics miss out on LGA funds, and slight statistical changes can alter an LGA allocation significantly. For instance, in Roseau, a town of about 2,600, Polaris Industries employs about 1,400. But many of the workers live outside the city, putting pressure on services such as roads, public safety and utilities. Critics say the LGA formula doesn't fully account for such added burdens.

"There's always going to be a special circumstance in one area or in several communities where the formula doesn't accurately take that into account," said Eric Willette, director of property tax research for the Minnesota Department of Revenue. Willette noted that some cities get their special needs met by appealing for extra money.

Adding to the complexity, if Roseau had just 100 to 200 fewer residents, its "need factor" under the formula would increase by 51 percent, Willette said. That would mean about 20 percent more money, he added.

Fridley City Manager Bill Burns is one who tried to fix the program. He took a proposal to the Legislature in 2008 that would distribute money based on a city's expenditures, rather than need — a model he hoped would resolve some perceived inequities in the distribution.

Burns' proposal had one hearing and never made it out of committee.

Source: State House of Representatives Research and League of Minnesota Cities

Stunted reform
In 2008, the Legislature created the LGA study group, which was asked to make its recommendations by December 2010.

The group, however, ended up meeting once in its first three years, and no recommendations have been made.

Group members — who include legislators, local leaders and policy analysts from city associations — came to the conclusion that any program changes would be ill-advised during a time of repeated cuts, said Rep. Paul Marquart,  DFL-Dilworth.

The group, which just met for the second time, now has a December 2012 deadline for its recommendations.

Marquart said he hopes to discuss ways to simplify the formula to make it more transparent and defensible.

But some fear that politics will get in the way.

Jay Kiedrowski, a senior fellow at the Humphrey School of Public Affairs and former state finance commissioner, said LGA has become increasingly politicized by legislators and lobbying groups focused on preserving their districts' funding while available money shrinks.

Last session, the Coalition of Greater Minnesota Cities sent mayors around the state, decrying proposed cuts.

The increased pressure from such organizations, though, ends up pitting cities against one another, Kiedrowski said. "I think we've lost sight of need in the formula," he said.

Patricia Nauman, executive director for Metro Cities, said that increased scrutiny can spark changes aimed at making the program more equitable.

But some argue that any change is still likely to be met with criticism.

"The experiments of the past are going to show us pretty much that once again if we try something new, there are going to be winners and losers and detractors," Runbeck said. "It doesn't seem to be a system that everyone will be happy" with.

This article was produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and funded in part with a grant from the Ethics and Excellence in Journalism Foundation.

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Comments (11)

Prudent people live within their means.

Cities should learn to spend less so they need less from state government, who in turn require less from the federal government. Maybe we should phase out LGA and do the citizens a favor by returning the taxing and spending decisions back to the local politicians who are most likely to face the immediate consequences, or benefits, from their actions.

2 meetings since 2008? Really?

Nobody understands the formula? Really?

Go to: http://www.lmc.org/page/1/property-tax-state-funding-fiscal-issues.jsp

There is a pretty good set of documents related to LGA calculation, which comes down to a half-dozen or so calculable numbers.

It is far likelier that LGA is an issue nobody WANTS to deal with, rather than an issue nobody understands.

After all, each state politician has a geographic base that includes cities receiving LGA.

It's clear that MinnPost negelcted to survey Apple Valley, Blaine, Eagan, Eden Prarie, Edina, Golden Valley, Plymouth or any of the hundreds of other cities that receive $0 LGA.

http://www.house.leg.state.mn.us/hrd/lgahistout.asp?type=cluster&cluster...

LGA was supposed to help small, outstate cities with little or no commercial tax bases fund their core services. Predictably, it's been co-opted by the leftist mayors of our largest cities to supply a slush fund with which they can backfill their general accounts, which they in turn drain to keep their social spending at unsustainable levels.

If we're going to keep an LGA fund, and I think there is an argument to be made in favor of that, we need to plug the holes leftist mice have gnawed into it.

Hopefully when the GOP strengthens it's legislature majority next year, that work can begin in earnest.

LGA, the "Minnesota Miracle" that redistributed a portion of property taxes from rich cities/suburbs to places of greater need, worked just fine until right-wing politicians like Pawlenty appropriated its dollars to use for balancing the state budget rather than raise enough revenue to meet the state's other needs.

Small towns and villages received money to develop water treatment systems or to hire sufficient police and fire personnel to protect their citizens. Large cities like St. Paul, with great swaths of governmental buildings (state, county, city) and non-profit properties not subject to real estate tax, used LGA to help keep up with the needs of immigrant, low-income and indigent populations.

LGA is the solution, not the problem. The problem is politicians who sign a no-new-taxes pledge dreamed up at the age of 12 by their guru Grover Norquist. They have not learned that we can settle for bad government on the cheap while our social and physical infrastructure crumbles around us OR use progressive taxation to raise enough revenue to fund good government.

Since I wasn’t here for the “Minnesota Miracle” (scant evidence of which I’ve come across since my arrival), most of the philosophical arguments for and against are new to me.

If, as Mr. Swift suggests, the idea was to help cities with little or no tax base with which to fund their core services, then perhaps the reason the cities he lists in #3 have received $0 in LGA funding is that they *do* have a significant tax base, whether retail or industrial. Not having lived in any of them, nor examined their respective budgets, I can’t say that for sure, of course, but it seems at least a possibility. Given the rationale for the program that Mr. Swift provides, there’d be no reason for the state to subsidize the core services of an affluent suburb or town with few social service needs and significant portions of its road system, for example, already subsidized through being built and maintained by the county or state.

I think it odd that the larger cities contributing the most to the state’s revenue stream are being condemned by some here for expecting to get at least some small portion of the revenue they contribute back in the form of LGA funding. Perhaps those cities *have* become somewhat dependent upon LGA funds to support some of their services, but individuals do the same thing when they take a job. We get used to that regular pay check, and it’s difficult, as many have discovered in the past few years, to budget for ‘x’ income only to find that the income we actually receive is substantially less.

I look forward to Mr. Tester’s list of the city services he currently receives that he’s willing to do without in order to promote fiscal prudence, and also to Mr. Swift’s list of “slush fund” activities in the state’s large cities. In the meantime, given Mr. Swift’s rationale for LGA, I’m inclined to agree with Ms. Vetsch in #4.

Ray observes:

"..perhaps the reason the cities he lists in #3 have received $0 in LGA funding is that they *do* have a significant tax base, whether retail or industrial."

Exactly. They are playing by the rules.

"..think it odd that the larger cities contributing the most to the state’s revenue stream are being condemned by some here for expecting to get at least some small portion of the revenue they contribute back in the form of LGA funding."

Well then, you find fault with the basic premise upon which LGA was constructed. As Bernice says, wealthier cities in effect "donate" money to poorer ones. To expect to get any portion back flies in the face of the supposed wisdom behind re-distribution.

Are you becoming a fiscal conservative Ray? ;-)

Slush fund activities:

In Saint Paul-

A triply redundant Human Rights division. There are two existing HR offices (state and county) within five blocks of the one Mayor Coleman created (at an annual cost of >$ 1 million). He handed the directorship over to one of his long time cronies, BTW.

A bicycle advisory board.

"Green" roofs (can't let Minneapolis have all the fun!).

A refrigerated, outdoor ice pond.

Purchase of the Schmidt Brewery, which we are told is soon to become "artist lofts"...a private investor to pay for any of this has yet to be found.

All these expenditures come from the general fund, which Coleman then backfills with LGA.

The problem with setting budgets, be it township, city or county - their budget year is the calender year, then the state legislature goes into session and changes all formulas and the entire budget process required is for naught.
What is required, change the budget year for the various townships,cities and counties to a July 1 to Jun 30 budget year, after the various sessions each enity then sets their budget knowing what the state has done/change/eliminated. Seems like a simple process BUT??????????

LGA is not a handout from the state, Thomas, and the larger cities are not "rich," although some of their inhabitants are.

Many are the poorest of the poor - homeless people whose jobs and houses have been lost or who are mentally ill and living on the street. Or 100% disabled and needing 24-hour care. Others are the large numbers of immigrants who usually settle in urban areas where there are social services to help them learn the culture and become self-sufficient.

And let's not forget police and fire protection for residents of densely populated cities and counties. Plus the public schools and parks and libraries and snow-plowers and all the other components of good government.

Pawlenty and current right-wing legislators are actually taking from low-income workers and the poor when they refuse to return some of OUR money to help OUR city be a decent place to live for all its inhabitants.

Ray S., by the way, gets it. Thanks Mr. Schoch.

I’ve been a fiscal conservative for many years. I just have different priorities, and would spend money in different ways, than Mr. Swift would choose.

It’s hard for me to tell, based on the comments and examples provided, whether Mr. Swift objects to the principle of LGA, or is more concerned about the way St. Paul’s government chooses to spend the LGA funding it gets. I don’t find fault with the premise of LGA funding at all. Minneapolis contributes a sizable portion of the dollars used by the state to function. It also has the state’s largest population, greatest need for social services, biggest expenses for infrastructure maintenance, and so on. There’s no reason I can think of, offhand, why Minneapolis, or St. Paul, or Rochester, or Duluth, should not get back some portion of what they contribute to the state’s operating funds, since their contribution to those funds may well outweigh what they receive in state services.

Suburbs typically have newer infrastructure, with markedly lower costs for maintenance as a result, and given the demographic patterns in the area over the past generation – I’m basing this on what I’ve read locally since becoming a resident – much of the wealth of the metro area has actively participated in the same “white flight” common to other metro areas in other parts of the country. I'm not sure that constitutes "playing by the rules," but it is what it is. Towns and cities with big tax bases (e.g., a major shopping complex, new manufacturing facility, etc.) and affluent populations are typically already being subsidized through infrastructure paid for by everyone in the county or state, and they typically – though certainly not always – have fewer costs associated with poverty, large-scale immigration, and social services in general. Those latter things, by the way, will change over time, and in another half-century, long after I’ve checked out, many of the places that get nothing in LGA funding may well be figuratively lining up at the Governor’s door with their hands out, all else being equal.

Beyond that, Mr. Weibel has a *very* valid point. It ought to be a no-brainer to have the state and its municipalities (and school districts? I don’t know their budgetary year dates) operating on the same fiscal calendar. Otherwise, trying to establish a sane and reasonable budget is an exercise in futility, not necessarily because of profligate spending, but because cities and towns budget for ‘x’ revenue, and then discover after the fact that some portion – in the case of school districts, a *major* portion – of the revenue they’d planned on won’t be there when they need it.

If the state legislature wants to continue the sham of “funding” the schools by withholding 40 percent of what’s supposed to be sent to them, being on the same calendar would at least allow the schools to make contingency plans with some basis in reality.

This discussion of LGA is why we should consider funding the metro area as a single region. It's fairly inefficient for neighboring suburbs to compete for revenues from new development--there's only so much demand for retail.

It's also hard to fault some of the older inner-ring suburbs that have received LGA like Mounds View and New Brighton, which developed as bedroom communities when most everyone commuted downtown, for functioning exactly as intended. Retail and industrial areas weren't part of the initial plans.

As for the self-sufficient suburbs that have never received any LGA, does anyone think, for example, that Thomson would have built its mega-campus in Eagan if Eagan were a stand-alone city in the middle of a Nebraska cornfield?

Every city has a role in the health of the metro area.