City Aid Declines Under Most LGA Proposals

For the last four and a half decades, the city Local Government Aid (LGA) program has helped cities fund essential services and control property tax levels, but in real (i.e., inflation-adjusted) dollars per capita, city LGA is currently less than half of what it was in its peak year of 1990 and about 20 percent less than it was in its inaugural year of 1972, as noted in a 2016 North Star article. Under two of the three proposals advanced by the Minnesota House, Senate, and Governor, the decline in real LGA will continue into 2018 and 2019. Only Governor Dayton’s LGA proposal stems the long-term trend of declining LGA.

Under current law, the LGA appropriation for aids payable in 2018 and 2019 is frozen at the 2017 level of $519.4 million. The House, Senate, and Governor have each taken different approaches to the LGA funding level over the next two years, as summarized below:

  • The House omnibus tax bill maintains the current law freeze at $519.4 million for aids payable in 2018 and 2019.
  • The Senate omnibus tax bill makes two separate changes to the current law LGA appropriation. The first is a one-time $12 million increase in the general aid appropriation in 2018; the second is a cap on the LGA received by the state’s largest city: Minneapolis. This cap—which was offered without a coherent policy rationale—has the effect of reducing Minneapolis’ 2018 LGA by $28.8 million relative to what it would have been without the cap. As a result of the $12 million general increase and the $28.8 million cut directed at Minneapolis, the Senate would reduce the total 2018 LGA appropriation by $16.8 million relative to the 2017 level. In 2019, the one-time $12 million increase sunsets, but the cap on Minneapolis LGA remains, resulting in a $28.8 million decline in the total appropriation relative to the 2017 level.
  • The Governor’s proposal increases the 2018 LGA appropriation by $20 million relative to current law, from $519.4 million to $539.4 million, and maintains the $539.4 million level in 2019. (The representation of the Governor’s proposal in this article incorporates two technical and largely non-controversial provisions that were included in the House and Senate proposals.*)

Over time, inflation erodes the real purchasing power of LGA dollars. The chart below shows the nominal (i.e., unadjusted for inflation) and real change in the total LGA appropriation under the House proposal (the red line), Senate proposal (the blue line), and Governor’s proposal (the green line) in 2018 and 2019, relative to the 2017 current law level. In each case, the nominal change is represented by the solid line and the real change is represented by the dashed line. For the purposes of this analysis, inflation in city purchases is conservatively estimated to be 2.1 percent annually in both 2018 and 2019.

By virtue of the frozen appropriation, the House proposal results in no nominal change in LGA funding in 2018 and 2019 relative to 2017; after adjusting for inflation, the real purchasing power of the LGA appropriation falls by about two percent from 2017 to 2018 and by another two percent from 2018 to 2019, for a total real decline from 2017 to 2019 of about four percent.

The nominal LGA appropriation under the Senate proposal falls by 3.2 percent from 2017 to 2018 and by another 2.4 percent from 2018 to 2019, for a total decline from 2017 to 2019 of 5.6 percent. After adjusting for inflation, the real purchasing power of the LGA appropriation under the Senate proposal falls by 5.2 percent from 2017 to 2018 and by 4.4 percent from 2018 to 2019, for a total real decline from 2017 to 2019 of 9.4 percent.

Under the Governor’s proposal, the nominal appropriation increases by 3.9 percent from 2017 to 2018, which surpasses the anticipated rate of inflation. As a result, the real purchasing power of the LGA appropriation under the Governor’s proposal increases by 1.7 percent over this period. Because the 2019 appropriation is unchanged from the 2018 level, real purchasing power of the appropriation in 2019 is 2.1 percent less than it was in 2018 and 0.4 less than it was in 2017. Estimates of future inflation are imprecise, so it is a fair approximation to say that the Governor’s proposal provides a modest increase in the real dollar LGA appropriation in 2018 relative to the 2017 level, before returning the real dollar appropriation to about the 2017 level in 2019.

In conclusion, by virtue of its $20 million LGA appropriation increase in 2018, the Governor’s proposal provides a modest real increase in LGA funding in 2018 and prevents a significant deterioration in LGA funding in 2019 relative to the 2017 level. This cannot be said of either the House or Senate proposals, which result in a real decline in the purchasing power of LGA dollars in 2018 and 2019. However, increases or decreases in the overall LGA appropriation do not necessarily translate into similar changes for each individual city. This is particularly true of the Senate proposal, which targets an especially large cut at the City of Minneapolis. The next installment in this series examines the estimated change in the LGA received by individual cities under the House, Senate, and Governor’s proposals.

 

*The House and Senate proposals change the base aid amount used as the starting point for the LGA calculations from (1) the prior year formula aid to (2) the prior year final aid. In addition, both proposals modify the population range for the transition from the medium to large city revenue need calculation from (1) 10,000 to 10,500 (current law) to (2) 10,000 to 11,000. Although these changes are not officially part of the Governor’s recommendation, they are largely non-controversial and likely to be acceptable to the administration, insofar as they address relatively minor technical issues in the current law aid calculation. In this analysis they are incorporated into the Governor’s proposal in order to avoid the perception of a significant policy difference when there is likely to be none.