State Aids: The Shrinking Slice of the City Revenue Pie

City property taxes have increased significantly in recent decades. Even after adjusting for inflation and population growth, the property taxes collected by Minnesota cities have increased by 48% from 1990 to 2018. However, real (i.e., inflation-adjusted) per capita city revenues are down over the same period. The rapid growth in property taxes and the decline in revenue are primarily the result of the same event: the sharp decline in state aids.

“Revenue base” is a term used by policy wonks to refer to the sum of property taxes plus state aids and credits. To adjust for erosion in the purchasing power of the dollar due to inflation and changes in city population during the period since 1990, this analysis examines these amounts in constant 2018 dollars per capita (i.e., per person).* The total 1990 revenue base of all Minnesota cities was $685 per capita. Approximately half (51%) of this amount consisted of city property taxes, with the remainder comprised of state aids and credits.†


During most of the period from 1990 to 2001, the city Local Government Aid (LGA) appropriation increased annually to keep pace with inflation, but not population growth. Most other categories of city aid either declined (e.g., Homestead and Agricultural Credit Aid or HACA) or were eliminated (e.g., Equalization Aid). As a result, per capita city aid gradually declined from $335 to $256—a 24% drop. Per capita city property taxes increased from $350 to $382, which replaced less than half of the decline in state aid. Over this period, the per capita city revenue base declined by $47 per capita or 7 percent.


A series of changes in the composition of city aid—including the introduction of the new Market Value Homestead Credit—resulted in a net increase in combined city aids and credits from 2001 to 2002.

During the subsequent eleven years—from 2002 to 2013—per capita state aids and credits received by cities declined from $267 per capita to $109 per capita—a whopping 59% reduction. The mechanics of these aid reductions were complicated, but the primary cause was simple: in response to recurring revenue shortfalls, state leaders embraced a conservative “no new tax” mentality. With few exceptions, revenue increases were off the table in response to these shortfalls, even though they were to a significant extent the result of unsustainable state tax cuts enacted in the late 1990s and early 2000s. A series of accounting gimmicks could only postpone a fiscal reckoning.‡ Ultimately, numerous categories of general fund spending—including aids to cities—were slashed.

During the 2002 to 2013 period, property taxes increased by $395 to $477 per capita—sufficient to replace about half the decline in state aids and credits. An earlier North Star analysis of State Auditor data showed that the most prevalent response to the decline in revenues was reduction in capital expenditures used to acquire long-term assets and extend the life of existing assets, such as streets, sidewalks, parks, and sewers.

A substantial increase in LGA in 2014 caused per capita city aid to jump from $109 to $125. Since 2015, real per capita aid to cities has declined slightly, as LGA appropriation increases have not been sufficient to keep pace with inflation and population growth. City property taxes increases in recent years have not been driven so much by state aid reductions, but by the need to restore cuts in capital expenditures made prior to 2013.

However, over the longer period extending back to 1990, the increase in city property taxes has been driven by the reduction in real per capita state aid. By 2018, city property taxes comprised 81% of the statewide city revenue base, while state aids comprised just 19%—a shocking reversal from the 51%/49% split in 1990.


This data shows that the growth in city property taxes over the last 28 years is not the result of the growth in city budgets; in fact, the real per capita revenue base of Minnesota cities—as well as city total revenues and expenditures—are less today than they were in 1990. Rather, the cause of city property tax growth has been a dramatic reduction in state aid.

 

*The conversion to constant 2018 dollars is based on the Implicit Price Deflator for State and Local Government Purchases, which is the appropriate index to use when adjusting state and local government revenues and expenditures for the effects of inflation.

”State aids” as used here refers to city Local Government Aid (1990-2018), city Equalization Aid (1990-1993), city Disparity Reduction Aid (1990-1993), city Local Performance Aid (1997-1999), city Homestead and Agricultural Credit Aid (1990-2001), and the city share of the Market Value Homestead Credit (2002-2011). City property taxes include total certified city levies excluding the city share of the market value homestead credit.

These accounting gimmicks include the delay of state aid payments to school districts in order to temporarily reduce general fund expenditures and the sale of a future stream of state revenue from the 1998 tobacco settlement for the sake of a one-time upfront cash infusion through the issuance of “tobacco settlement revenue bonds.”