New LGA Reform Plan Emerges at the Capitol

In addition to the governor’s local government aid (LGA) reform proposal, a group of legislators and city representatives has developed a new LGA formula concept.
(Published Mar 18, 2013)

With Gov. Dayton’s release of his proposed fiscal year (FY) 2014-15 budget in late January, he included an $80 million increase in funding for local government aid (LGA) and a recommendation for a major revision to the LGA formula. This proposal remains in the supplemental budget the governor released on March 14.

The governor’s LGA formula recommendation was not unexpected due to the fact that the current LGA system has been in place for more than a decade and many of the formula factors were originally computed in 2002 and based on information that is now more than 10 years old.

In addition to the need for a formula update, the LGA system has not functioned properly in recent years due to state budget deficits and frequent LGA appropriation cuts. Since 2008, the method used to implement those reductions has created distortions in the LGA system. Rather than use the LGA formula to distribute a smaller appropriation, the reductions were generally computed retroactively and were based not on the LGA formula but instead computed as a percent of each city’s certified levy plus LGA. Smaller cities were also frequently protected from reductions in the LGA formula.

Under the current plan
When the current LGA formula is once again used to distribute LGA beginning in 2014, the combination of these recent funding cutbacks and the need to update the formula will result in significant shifts in LGA. In fact, 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.

Governor's plan
Although the LGA system is in need of an update, the specifics of the governor’s plan were not immediately embraced by legislators. The governor’s plan provided all cities that were scheduled to receive LGA in 2013 with an immediate $30 per capita increase for 2014.

However, that increase was only temporary. Beginning in 2015, the governor’s new formula would be used to distribute the LGA appropriation, and many cities would have experienced an annual decline in their LGA distribution. Legislators questioned whether the first year increase for many cities followed by a slow decline as the new formula was phased in was a good policy.

New proposal
With the governor’s proposal gaining little traction, in mid-February Rep. Jim Davnie (DFL-Minneapolis), who chairs the Property and Local Tax Division of the House Taxes Committee, convened a meeting of a group of legislators and city representatives to pose a question: can we find a way to update the LGA system that can be broadly supported? The group has included representatives of the League, Metro Cities, the Coalition of Greater Minnesota Cities, and the cities of Minneapolis and St. Paul.

That group has met on a regular basis since the first meeting on Feb. 12 and has reviewed numerous options for updating the LGA formula. Last week, the group focused in on a formula concept that would update the existing LGA formula and use an amount equal to the governor’s $80 million appropriation increase, plus an annual inflator for the LGA formula.

The participants in the group have found this plan to have many merits. The group’s proposed formula would simplify the current LGA formula by eliminating “side pots” within the existing formula, and would produce a more stable LGA distribution system that should not subject cities to large swings in their annual LGA distribution.

The plan employs 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 sized 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.

More details of new plan
HF 1608 (Rep. Ben Lien, DFL-Moorhead) was introduced on March 18. Co-authors of the bill include: Rep. Jim Davnie (DFL-Minneapolis), Rep. Ann Lenczewski (DFL-Bloomington), Rep. Erik Simonson (DFL-Duluth), Rep. Tim Faust (DFL-Hinckley), Rep. Tim Mahoney (DFL-St. Paul), Rep. Greg Davids (R-Preston), Rep. Lyndon Carlson (DFL-Crystal), Rep. Clark Johnson (DFL-North Mankato), Rep. Rod Hamilton (R-Mountain Lake), Rep. Paul Torkelson (R-Hanska), Rep. Deb Kiel (R-Crookston), Rep. Michael Nelson (DFL-Brooklyn Park), Rep. Jay McNamar (DFL-Elbow Lake), Rep. Rick Hansen (DFL-St. Paul), and Rep. Paul Marquart (DFL-Dilworth).

The League's Board of Directors will be discussing the LGA reform proposal at its monthly board meeting on Wednesday, March 20. The League will continue to update Third Reading with more analysis and information about the new plan going forward.

Access additional resources on this plan:

—Summary of new proposed city LGA plan as compared to existing formula, includes LGA values by city

—Proposed New LGA Plan

—Current LGA law in 2014 compared to the governor's plan

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