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The plan updates the current system that was originally enacted in 2002, simplifies and stabilizes the formula, and increases the appropriation for the first time since 2009.
(Published Mar 25, 2013)
The League Board of Directors voted on March 20 to support legislation that would update, reform, simplify, and stabilize the local government aid (LGA) system and restore a portion of recent LGA cuts, as well as the annual appropriation inflation adjustment.
The House bill currently has 17 co-authors: Reps. Jim Davnie (DFL-Minneapolis), Ann Lenczewski (DFL-Bloomington), Eric Simonson (DFL-Duluth), Tim Faust (DFL-Hinckley), Tim Mahoney (DFL-St. Paul), Greg Davids (R-Preston), Lyn Carlson (DFL-Crystal), Clark Johnson (DFL-North Mankato), Rod Hamilton (R-Mountain Lake), Paul Torkelson (R-Hanska), Deb Kiel (R-Crookston), Mike Nelson (DFL-Brooklyn Center), Jay McNamar (DFL-Elbow Lake), Rick Hansen (DFL-South St. Paul), Paul Marquart (DFL-Dilworth), Dan Fabian (R-Roseau), and Diane Loeffler (DFL-Minneapolis).
The Senate bill is co-authored by Sens. Ann Rest (DFL-New Hope), Kari Dziedzic (DFL-Minneapolis), and David Senjem (R-Rochester).
During the LMC Board meeting, members discussed the fact that the current LGA formula was largely enacted in 2002 and the formula coefficients are based on data that is now more than 10 years old. The fact that the formula was due for an update was widely agreed upon and, in fact, over a year ago, Gov. Dayton assembled a group of 15 mayors to review the LGA system and make recommendations on possible avenues for reform and update. Prior to the governor’s effort, the Legislature established an LGA study group in 2008 to study the system and make recommendations for reform.
At its February meeting, the LMC Board discussed the proposal offered by the governor that was released in late January. The governor included an $80 million increase in funding for LGA and a recommendation for a major revision to the LGA formula. The Board supported the $80 million restoration of recent LGA cuts and the simplification and stabilization features of the plan. However, the Board raised concerns about the first-year LGA increase that for many cities was followed by a three- to four-year decline as the new formula was phased in.
Absent any changes this year, the existing LGA formula is scheduled to be used once again to distribute LGA in 2014. The combination of recent funding cutbacks and the need to update the formula will result in significant shifts in LGA. According to estimates prepared by the House Research Department, there will be 640 cities that will experience a reduction in their LGA distribution in 2014 if the current formula is used to distribute the current $426 million appropriation.
New formula proposal
Under HF 1608/SF 1491, the LGA formula would be updated by using a three-tier LGA need factor calculation depending on the population of the city with separate “need” calculations for cities under 2,500 in population, cities between 2,500 and 10,000 in population, and cities over 10,000 in population. Statistical analysis showed that different factors explained variations in city revenue base for different size cities. All three formulas were derived using revenue base (levy plus aid) as a proxy for city need. The small city need calculation is based on a graphical analysis, the medium and large city need calculations are based on regression analysis similar to the techniques used in previous LGA formulas.
The bill stabilizes the LGA system by modifying the method used to allocate the annual appropriation increase. Cities whose current LGA distribution is furthest from their unmet need will receive proportionally larger increases. The bill would also cap the maximum annual loss for any city which would allow cities to accurately plan for formula changes.
The bill also significantly simplifies the LGA system. The bill repeals seven pages of LGA statutes that are obsolete under this LGA proposal and eliminates several of the formula side pots.
Under the bill, 92 cities would experience a reduction in their LGA distribution. However, in the first year (2014), the bill would prevent any reductions to cities. In the future, the bill would limit reductions to a yet-to-be-defined percentage of their previous year’s levy.
The bill includes an annual inflation and population adjustment to the LGA appropriation that would be limited to between 2.5 percent and 5 percent per year.
For more information on the bill and the recent history of LGA:
The bill was heard on March 20 in the House Property and Local Tax Division and will likely be scheduled for a hearing when the Legislature reconvenes after the Easter/Passover recess on April 2.
If you have questions on the LGA formula proposal contained in HF 1608, please contact Gary Carlson (see right).
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Contact Gary Carlson
(651) 281-1255 or (800) 925-1122
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