Local Government Aid During a Potential Special Session

An August North Star article described the main effect of no 2016 special session: a larger state budget reserve. The same article noted some of the likely effects if there is a special session, including “an increase in state assistance to local governments.” With renewed discussions among the Governor and legislative leaders regarding a special session, there is once again interest in some of the issues that might be on the table during such a session. This article will focus on one such issue: city Local Government Aid (LGA).

If there is no 2016 special session, LGA will likely be distributed to Minnesota cities in 2017 based on current law. Under current law, the LGA appropriation in 2017 and subsequent years is frozen at the 2016 level ($519 million). In effect, this will mean minimal aid increases in 2017 relative to the 2016 level for 654 cities, reductions for 116 cities, and no change in LGA for 83 cities. When the LGA of a city is frozen or increases only minimally, the real purchasing power of the aid declines due to the effects of inflation. This creates increased pressure for property tax increases and/or cuts in spending on city services and infrastructure.

The House position on LGA would reduce the LGA of Duluth, Minneapolis, and Saint Paul to $108 per capita in 2017; this aid limit was not applied to other cities, even though 618 of the other 850 Minnesota cities receive aid in excess of $108 per capita. The House position would reduce Duluth’s 2017 LGA by $20 million (69 percent), Minneapolis’ LGA by $34 million (44 percent), and Saint Paul’s LGA by $31 million (49 percent). For other cities, the House position would result in very little change in their LGA relative to current law. As a result of the Duluth, Minneapolis, and Saint Paul aid reductions, the House position would have reduced the total LGA appropriation from $519 million to $434 million—a 16 percent cut.

After 2017, the LGA of Duluth, Minneapolis, and Saint Paul would likely continue to decline under the House position, but the rate of year-to-year decline beginning in 2018 would likely be minimal. The total statewide LGA appropriation would also likely decline again in 2018 and subsequent years, but this rate of decline would also be minimal.

The Senate position on LGA was distinctly different from that of the House. Rather than cut the LGA of three of the state’s largest cities and dramatically reduce the total LGA appropriation, the Senate voted to increase the appropriation from $519 million to $541 million in the first year of implementation and to $565 million in the second year. After the second of these two increases, the LGA appropriation would be restored to the 2002 level, although—due to the effects of inflation and population growth—the real per capita purchasing power of these aid dollars would still be far below the 2002 level. Nonetheless, the Senate position would provide significant LGA increases for the vast majority of Minnesota cities relative to current law.

The compromise reached by the 2016 House-Senate tax conference committee would increase the 2017 LGA appropriation from $519 million to $539 million—an increase of nearly four percent. The conference committee compromise on LGA was closer to the Senate position in that there was a significant appropriation increase and no cuts targeted at Duluth, Minneapolis, and Saint Paul. However, unlike the Senate position, the compromise would not have provided a second appropriation increase in 2018. The tax conference committee report was vetoed by Governor Dayton due to a drafting error unrelated to LGA.

The chart below shows the percent change in 2017 LGA under the House position, Senate position, and the tax conference committee compromise relative to what 2017 aid would be under current law. The change is shown for all Minnesota cities, cities in the seven county metropolitan area, and Greater Minnesota cities. The reduction in LGA under the House proposal is driven by the aid cuts to Duluth, Minneapolis, and Saint Paul. The cuts to these three cities are large enough to drive significant statewide and regional aid reductions, even though the House proposal results in no significant aid reduction for any city other than Duluth, Minneapolis, and Saint Paul.

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The 2017 aid increases would be somewhat larger under the Senate position than under the tax conference committee compromise, due to the fact that the Senate’s 2017 LGA appropriation increase was $1.5 million greater than the compromise appropriation increase. The vast majority of Minnesota cities would receive slightly more aid in 2017 under the Senate position than under the compromise.

The next chart shows the estimated percent change in 2018 LGA under the House position, the Senate position, and the tax conference committee compromise relative to what 2018 aid would be under current law for all Minnesota cities, metropolitan cities, and Greater Minnesota cities. Once again, the statewide and regional aid reductions under the House position are driven by the cuts to Duluth, Minneapolis, and Saint Paul.

lga18

The aid increase relative to the 2018 current law level is much greater under the Senate position than under the tax conference committee compromise because of the Senate’s additional $25 million appropriation increase in 2018. As a result, the vast majority of cities would receive significantly more aid under the Senate position than under the compromise. Conversely, the vast majority of cities would receive more aid under the compromise than they would under the House position.

The charts above reveal that—under both the tax conference committee compromise and the Senate position—metropolitan cities would receive a larger percentage LGA increase in 2017 and 2018 than would Greater Minnesota cities. On the other hand, Greater Minnesota cities would receive a larger per capita increase (i.e., aid increase per city resident) than metro cities.

On the one hand, if there is no 2016 special session, the aid received by cities in 2017 will be based on current law, provided that there are no changes to 2017 LGA enacted during the 2017 legislative session. On the other hand, if a tax bill is passed during a special session, it is likely that 2017 LGA payments will be based on the tax conference committee compromise. With only a few weeks left before cities set their 2017 levies and budgets, city officials (and property taxpayers) are anxiously awaiting final word from the State Capitol regarding prospects for a special session.