Local Government Aid (LGA) has long been an important source of funding for city services and property tax relief. A 2018 LGA funding hike provided valuable new resources to cities, but not quite enough to keep pace with inflation and population growth from 2017 to 2018. Today total real (i.e., inflation-adjusted) per capita (per person) funding for LGA remains not only well below its historic peak, but also below the level at which it was initially funded in 1972. An examination of changes in LGA funding over time yields a historical perspective on current funding levels.

Lawmakers established LGA during the 1971 legislative session, and it was first distributed in 1972. The purpose of the new aid program, according to a 1985 House Research Department information brief, was to consolidate “a variety of programs” in a way “intended to make the state aids system more cognizant of differences in ‘need’ [for state assistance] among local governments.”*

To adjust for erosion in the purchasing power of the dollar over time due to inflation and growth in the population that cities serve, we will examine LGA funding in constant 2018 dollars per capita.†

Total LGA received by cities in 1972 came to $150 per capita. Throughout the rest of the 1970s, LGA funding increased as the state’s economy expanded. LGA funding temporarily crested in 1979 at $253 per capita. In response to a recession-driven budget crisis, the state cut LGA funding in the early 1980s. By the mid-1980s, LGA had recouped much of the loss incurred during the recession. By 1988, city LGA recovered to $227 per capita—well above the 1982 nadir but still below the 1979 level.

City LGA peaked in 1989 at $267 per capita. In that year the first of a new wave of aid and credit programs was also distributed to cities.‡ A combination of these new programs in 1990 more than offset a significant decline in LGA, so that total city property tax relief aids and credits increased to an all-time high of $331 per capita.

The mix of LGA and other city aids and credits varied throughout the 1990s, but total aids and credits declined throughout this period. By 2001, city LGA dropped to $169 per capita, while total city aids and credits sunk to $252 per capita. Adoption of a new LGA formula in 2002 coincided with a large LGA funding increase, but this was partially offset by a reduction in other property tax aids and credits. Total city aids and credits were $262 per capita.

Beginning in 2002, both LGA and other property tax aids and credits plummeted. Recurring deficits, compounded by “no new tax” dogma and later exacerbated by the onset of the Great Recession, caused the aids and credits to fall. All other property tax aid and credit programs were were eliminated by 2012. In 2013 LGA crashed to an all-time low of $106 per capita—less than half of the 2002 level and less than a third of the peak total per capita aid level achieved in 1990.

A partial yet significant restoration of LGA funding arrived in 2014; in that year a large appropriation increase accompanied reforms to the aid distribution formula. As a result of the new funding, LGA per capita grew to $122 per capita—a 15% increase over the prior year level. Real per capita LGA has declined slightly since 2014, as appropriation increases could not keep pace with inflation and population growth. For example, the $15 million LGA funding hike distributed in 2018 provided a 2.9% increase—shy of the 3.5% increase needed to keep up with inflation and population growth.

In 2018, LGA stands at $116 per capita—9% above the all-time low point of 2013. However, 2018 per capita LGA is 49 percent less than in 2002, the last year before a decade of state budget cuts. It is also 57 percent less than during the peak year of 1989 and 23 percent less than in 1972, the first year of the program. If we broaden our perspective to include total city property tax aids and credits, real per capita funding has fallen 65 percent from the 1990 peak.

Competing demands for state resources, an illusory budget surplus that disappears when properly adjusting for inflation, and a host of potential economic perils make full restoration of LGA funding to peak year levels nigh on impossible. However, given the historically low current funding level, cities are likely to seek some increase in LGA to forestall property tax increases and ensure adequate funding of city services.

________________________________________________________________________

*LGA was initially distributed not just to cities, but to townships, counties, and special taxing districts. Since 2001, LGA has gone exclusively to cities, although other jurisdictions receive other forms of state general purpose aid. This analysis will focus only on the LGA and other property tax aids and credits received by Minnesota cities.

†Inflation adjustments in this article are based on the Implicit Price Deflator for State and Local Government Purchases, which is the appropriate index to use when adjusting city finances for the effects of inflation.

‡This new wave of aid and credit programs included city disparity reduction aid (1989 to 1993), equalization aid (1990 to 1993), city homestead and agricultural credit aid (1990 to 2001), local performance aid (1997 to 1999), and the city share of market value homestead credit payments (2002 to 2011). From 1989 to 2011, these other property tax aid and credit programs supplemented state LGA payments to cities.