City LGA: A Shrinking Slice of the Budget Pie

Local Government Aid (LGA) has been a mainstay of city finances since its inception in 1972. In fact, many small, low tax base communities receive more in LGA than they collect in property taxes. That being the case, LGA is a perennial hot topic at the state capitol. A recent North Star article demonstrated that real per capita LGA has fluctuated substantially during its 45 year existence. In constant 2016 dollars, per capita LGA is currently above its historic nadir set in 2013, but well below its highpoint of the late eighties and early nineties.

Another way to view LGA funding is as a percentage of total state general fund spending. This approach measures the state’s commitment to LGA relative to all of the other public needs that place a demand on general fund resources. In order to provide a more meaningful comparison over time, the following analysis will examine other general purpose city aids in addition to LGA.* From 1972 to 2015, the percentages are based on final aid and general fund data; for 2016, 2017, and 2018, percentages are based on current law aid appropriations and projected general fund spending.

LGA-GF graph

In 1972, city LGA comprised 4.2 percent of total general fund spending. For the next eighteen years, combined LGA and other general purpose city aid climbed intermittently, ultimately reaching a zenith of 7.1 percent in 1990. Since 1990, combined city aid has steadily declined, bottoming out at 2.2 percent in 2013. As a result of an $80 million appropriation increase, LGA (since 2012, LGA has been the only statewide city aid program, the last of the other aid programs having been terminated in 2012) as a percent of general fund spending jumped to 2.5 percent in 2014 and 2015. As a result of a frozen LGA appropriation and modest growth in total state spending, LGA as a percentage of general fund expenditures is projected to drop to 2.3 percent by 2018, assuming no change to current law.

So under current law, 2.3 cents of each dollar of state general fund expenditures will be spent on city LGA in 2018. This is slightly greater than the low point of 2013, but less than one-third of the 1990 level and just over half the level in 1972—the first year of the LGA program.

On the one hand, no program is guaranteed a fixed percentage of the state general fund spending year in and year out—and neither should LGA. Moreover, there is good reason to expect the share of state resources spent on LGA to shrink somewhat over time, given the rapid growth in healthcare costs and the aging of the state’s population, which has caused growth in health & human service (HHS) spending to outpace other categories of general fund spending. As HHS spending takes a larger slice of the state general fund pie, the size of the slices accorded to other categories of state general fund spending—including LGA—of necessity must shrink.

On the other hand, the effects of inflation and population growth will invariably place upward pressure on total city spending. If LGA is perpetually frozen, all of this pressure will be borne by property taxes—and increased dependence on property taxes will mean a more regressive tax system. In 2013, state policymakers made major progress in reducing tax regressivity. It would be a shame to let that progress slip away now by maintaining policies that will contribute to future property tax growth.

There is also a historical argument that can be made for increasing the LGA appropriation. An examination of LGA funding levels since 1972 reveals that when the state experiences a revenue shortfall, LGA and other aids to local governments are generally reduced. And often the reduction to LGA and other aids is greater than cuts absorbed by other areas of general fund spending. If LGA is to be cut during periods of revenue shortage, it must be increased during periods of surplus if it is to avoid perpetual shrinkage and ultimate irrelevance.

Incidentally, the same arguments that can be made for an increase in the LGA appropriation can also be applied to other forms of state aid to local governments, such as County Program Aid (CPA). Like LGA, CPA has declined in real dollars per capita since its inception. Like LGA, CPA has shrunk as a percentage of state general fund spending. Like LGA, CPA is frequently cut in response to a state revenue shortfall. And like LGA, frozen CPA will lead to a combination of property tax increases and reduced funding for local services and infrastructure.

In light of shifting state priorities, no program should be perpetually guaranteed a fixed percentage of state general fund resources. However, during a period of surplus, a strong case can be made for a funding increase for LGA and other aids to local governments. Replacing a portion of the aid that was cut in previous years would help to curtail growth in regressive property taxes and help ensure the local services and infrastructure are adequately funded.

 

 

*The other general purpose aids included in this analysis are disparity reduction aid, equalization aid, homestead and agricultural credit aid, local performance aid, and the city share of the market value homestead credit. (Some combination of these “other aids” were paid in addition to LGA each year from 1989 to 2011.) To calculate city aids as a percentage of general fund spending, calendar year aid amounts are divided by total general fund spending from the subsequent fiscal year (e.g., 2015 LGA as percent of general fund spending was calculated by dividing calendar year 2015 LGA payments by fiscal year 2016 general fund spending). This approach is used because—throughout recent history—LGA and other city aid payments are made within the second half of the calendar year and thus occur within the subsequent state fiscal year, which begins on July 1.

The spike in LGA as a percentage of total general fund spending in 2009 was due to two separate events. First, a portion of prior year LGA cuts were restored on a one-time basis. Second, state general fund spending was dramatically reduced in FY 2010 (the fiscal year in which calendar year 2009 LGA payments were made) due to (1) K-12 funding shifts and (2) replacement of general fund spending with dollars from the American Recovery and Reinvestment Act (a.k.a. federal stimulus dollars).