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Details of new local government aid (LGA) plan developed by legislators and city representatives are unveiled in HF 1608.
(Published Mar 18, 2013)
This article was updated at 2:30 p.m. on Monday, March 18.
Details of New Plan Unveiled
HF 1608 (Rep. Ben Lien, DFL-Moorhead) was introduced on Monday afternoon. Coauthors 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 their 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:
Context for LGA Reform
With the governor’s release of his proposed 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. The governor’s LGA formula recommendation was expected for two reasons: 1) the current LGA system has been in place for more than a decade and 2) many of the formula factors were originally computed in 2002 and are based on information that is now ten years old.
In addition to the need for a formula update, the LGA system has not functioned well 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. They 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.
If Nothing Changes
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 Gets Little Traction
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.
Formulation of a New Plan
With the governor’s proposal gaining little traction, Representative Jim Davnie (DFL-Minneapolis), who chairs the Property and Local Tax Division of the House Tax Committee, convened a meeting of a group of legislators and city representatives in mid-February. The group included representatives of Metro Cities, the Coalition of Greater Minnesota Cities, the League of Minnesota Cities and the cities of Minneapolis and St. Paul. This group was directed to examine the following question: Can we find a way to update the LGA system, and have it be done in a broadly supported way?
That group has met on a regular basis since February 12 and has reviewed numerous options for updating the LGA formula. Earlier this week, the group focused 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 formula would simplify the LGA formula by eliminating “side pots” within the existing formula and would produce a more stable LGA distribution system that is intended to minimize large shifts in cities' annual LGA.
The plan employs a three-tier LGA need factor calculation that is dependent on the population of the city with separate “need” calculations for cities under 2,500 population, cities between 2,500 and 10,000 population, and a third calculation for cities over 10,000 population. A 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.
Questions? Contact Gary N. Carlson at (651) 281-1255 or email@example.com
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