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Governor Dayton’s city Local Government Aid (LGA) proposal increases the LGA appropriation in the upcoming two year budget, while the House freezes the appropriation and the Senate cuts it, as noted in the preceding North Star article. Knowledge of the appropriation alone, however, does not tell us how much aid individual cities will receive. In addition to the appropriation level, the LGA received by a specific city depends on the operations of the aid formula and changes to the aid distribution contained in the competing LGA proposals.

Simply because the LGA appropriation increases from one year to the next does not mean that all cities will receive an aid increase. For example, if the aid that a city received in the preceding year exceeds the amount of aid it should receive in the current year based on the gap between its current revenue need and local revenue raising capacity—defined in statute as its “unmet need”*—the aid of the city will generally decline, even if there is an increase in the appropriation. Cities in which the unmet need exceeds the prior year aid amount† will generally receive an aid increase; the larger the gap between a city’s unmet need and its prior year aid amount, the larger the aid increase, all other things being equal.

Proposed changes in the aid formula also alter the distribution of aid. For example, the House and Senate proposals change the base aid amount used as the starting point for the current year aid calculation; this technical change results in an aid increase for approximately thirty cities. Because these cities receive more aid, the aid available for distribution to other cities is reduced, resulting in a very small aid reduction for those cities relative to what they would have received in the absence of this formula change.

Arbitrary restrictions on the amount of aid that a particular city or set of cities can receive will also alter the aid available for distribution to other cities, all other things being equal. For example, even though the Senate proposal reduces the 2018 LGA appropriation by $16.8 million, it also arbitrarily reduces Minneapolis’ LGA by $28.8 million (essentially removing Minneapolis from the formula), leaving a net increase of $12 million in 2018 aid available for distribution to other cities. As a result, the 2018 LGA of most cities—excluding Minneapolis—increases under the Senate proposal, but, as described below, the decision to remove Minneapolis from the formula has some unanticipated consequences for the 2019 aid distribution, when the one-time $12 million increase sunsets.

Using information from the House Research Department, Senate Counsel & Research, and other sources, North Star has compiled a table showing estimated LGA payable in 2018 for each Minnesota city under current law and the House, Senate, and Governor’s proposals. This table also shows the percent change in 2018 LGA under each of the three proposals relative to 2018 current law. A separate table shows similar information for LGA payable in 2019 for each city. (See notes in each table for technical details.)

The chart below shows the number of cities by the estimated percent change in their LGA under the House, Senate, and Governor’s proposals relative to current law, based on information from these tables. The first set of three bars focuses on the percent change under each of the three proposals in 2018 relative to 2018 current law. The second set of bars shows the same information for 2019.

 

Under all three proposals, just over 170 cities experience no change in their LGA relative to current law in either 2018 or 2019. This group consists primarily of cities that either: (1) receive no aid at all because their local revenue raising capacity exceeds their revenue need as determined by current law formulas; or (2) have prior year aid amounts that exceed their unmet need, and thus are subject to aid reductions. The remaining cities—approximately 680—generally have significantly different outcomes under the three proposals.

Under the House proposal, 43 cities are expected to receive more aid in 2018 than they would have under current law; for 31 of these cities, or 72 percent, the aid increase relative to 2018 current law will exceed two percent. These aid increases are the result of four somewhat technical modifications to the LGA formula, including the change in the base aid amount used as the starting point for the current year aid calculation, mentioned above. There is no increase in the total aid appropriation under the House proposal, so the aid increase for these 43 cities results in a very small aid reduction for 639 other cities; while the percent reduction for 40 of the 639 cities exceeds 0.5 percent, the dollar reduction relative to 2018 current law is still generally quite small. The LGA impact of the House proposal relative to current law in 2019 approximately resembles the impact in 2018.

By virtue of the additional $12 million distributed among cities (excluding Minneapolis) in 2018, the Senate proposal produces aid increases relative to current law for 675 cities; in 392 of these cities, or 58 percent, the increase exceeds two percent. Minneapolis is the only city that loses aid in 2018 under the Senate proposal relative to current law—and that reduction is huge: $28.8 million, or 36 percent of its estimated 2018 aid distribution. Minneapolis is targeted for this extraordinary reduction despite the fact that most other Minnesota cities already receive more per capita aid than Minneapolis, even prior to the reduction.

The distribution of aid under the Senate proposal shifts in 2019, when the one-time $12 million increase in aid to non-Minneapolis cities goes away. 58 cities still receive an aid increase in 2019 relative to 2019 current law, but 638 cities receive less aid. Although the aid reductions relative to 2019 current law are generally small, they are noticeable for some cities: for example, Duluth receives about $40,000 less in 2019 under the Senate proposal than they would have received under current law, while Rochester receive $32,000 less and Saint Cloud receives $53,000 less. The 2019 aid reductions under the Senate proposal were made slightly larger by virtue of the fact that Minneapolis is removed from the formula and thus does not participate in the $12 million aid reduction in 2019; as a result, other cities must bear a larger share of this reduction.

The Governor’s proposal—by virtue of its larger appropriation increase in 2018 and by the fact that it does not rescind that increase in 2019—provides larger aid increases for more cities in both 2018 and 2019 than either the House or Senate proposals. For example, 679 cities receive an aid increase relative to current law in both 2018 and 2019, and for 532 of these cities, or 78 percent, the increase exceeds two percent. No city experiences an aid reduction relative to current law in either 2018 or 2019 under the Governor’s proposal.

To this point, the analysis in this proposal has been in nominal dollars (i.e., dollars unadjusted for inflation). Because inflation erodes the purchasing power of LGA over time, it is important to examine the change in aid in real (i.e., inflation-adjusted) dollars.‡ Only the Governor’s proposal provides LGA funding sufficient to maintain the real purchasing power of LGA dollars at the 2017 level in both 2018 and 2019 for a significant number of Minnesota cities.

Under the Governor’s proposal, over two-thirds of cities that are “on the formula” (i.e., receiving LGA greater than zero) will receive 2018 aid sufficient to keep pace with inflation relative to the 2017 level. Meanwhile, the Senate proposal provides 2018 aid sufficient to keep pace with inflation in over half of these cities, compared to just over four percent under the House proposal. In 2019, 43.5 percent of on-formula cities receive aid sufficient to keep pace with inflation relative to 2017 under the Governor’s proposal, compared to less than three percent under the House proposal and less than one percent under the Senate.

For nearly a half century, Local Government Aid has been an important source of property tax relief and funding for city services. Of the three major aid proposals being considered during the 2017 legislative session, only the Governor’s avoids any nominal aid reduction for any city relative to current law and maintains or enhances the real purchasing power of LGA dollars for a significant number of Minnesota cities over the next two years.

 

*More precisely, a city’s “unmet need” is equal to its revenue need—as defined by statistical regression equations based on city demographic characteristics—minus its local revenue raising capacity, which is equal to its local tax base times the statewide average city tax rate.

Under current law, a city’s aid is actually based upon the gap between its prior year “formula aid”—not its prior year final aid—and its unmet need. However, both the House and Senate proposals would change the amount used in the aid calculation from the prior year formula aid to the prior year final aid. Because this change is generally viewed as a technical correction to a glitch in the current law formula, the analysis presented in this article (and in the accompanying tables) also incorporates this change into the simulation of aid levels under the Governor’s proposal, as noted in the preceding article.

For the purposes of this analysis, inflation in city purchases is conservatively estimated to be 2.1 percent annually in both 2018 and 2019.