Large losses in state aid to cities have caused property taxes to shoot up at the same time that investment in local services and infrastructure takes a nose dive. Minnesota’s major city organizations have united in an effort to halt this ongoing erosion of state support for property tax relief and local services.
In the past, cities have disagreed among themselves regarding the best way to distribute state aid. Disputes between the central cities, metropolitan suburbs, greater Minnesota regional centers, and small cities about who should get the largest slice of the local government aid (LGA) pie have been a road block to reversing the large cuts in city LGA made in 2003 and 2004.
Minnesota cities decided to bury the hatchet this year (and not into each other). The “City Unity” LGA proposal has been endorsed by the leaders of the largest city organizations in the state and by the mayors of Minneapolis and Saint Paul. The League of Minnesota Cities, whose membership includes 829 of Minnesota’s 854 cities, also endorsed the plan.
The City Unity proposal would increase the LGA appropriation by $90 million beginning in 2009. While a $90 million increase is small compared to the significant decline in city LGA-in constant 2008 dollars, city LGA has declined by $270 million from 2002 to 2008-it is at least a step in the right direction from the perspective of most Minnesota cities.
The per capita decline in LGA in Minneapolis and Saint Paul has been more than three times greater than that of other Minnesota cities. The Unity LGA proposal restores only a portion of the aid cuts in these cities. However, given that aid to the central cities has continued to shrink in recent years and given that this decline is projected to continue into 2009 unless changes to the LGA program are made, leaders in both cities are supporting the Unity LGA proposal.
Saint Paul Mayor Chris Coleman noted the severe impact that aid cuts have had on the budget of his city.
“Even with recent property tax increases, the real purchasing power of the city’s revenue base has declined by 24 percent since 2002 after adjusting for inflation,” said Mayor Coleman. “This has lead to painful cuts in parks and recreation, consolidated departments, and tough choices on spending.”
“The LGA increase in the Unity proposal won’t solve all of Saint Paul’s budget problems, but it’s a good start,” added Coleman.
Many inner-ring suburbs are experiencing some of the same problems as Saint Paul and Minneapolis, as crime and other social problems spill beyond the borders of the core cities. These communities also have aging infrastructure, presenting additional costs for maintenance of roads, sewers, and public buildings.
According to Tom Goodwin, President of Metro Cities and an Apple Valley Council Member, “Many metro area cities have lost all of their LGA in recent years, at the same time that their need for state assistance and property tax relief is increasing.”
Goodwin notes that more than 50 metro cities have lost all of their LGA since 2002, including older and relatively low tax base communities such as Blaine, Brooklyn Park, Cottage Grove, and Champlin.
While some metropolitan cities have managed to hold on to some LGA, nearly all have seen extremely deep cuts. Cities like Brooklyn Center and Richfield have lost up to half or more of their LGA since 2002 after adjusting for inflation. Overall, from 2002 to 2008 the LGA received by metropolitan cities has declined by 48 percent in constant 2008 dollars.
“The thing about the Unity proposal that I like is that it recognizes the urban problems that our core cities and older suburbs are facing,” argued Goodwin. “Many of the cities that were facing the choice of either increasing taxes or cutting services are finally getting some relief.”
A problem with the current LGA system is that a city’s state aid can vary significantly from year to year, making it difficult for cities to plan their budgets. According to Bill Barnhart, a lobbyist representing the North Metro Mayors Association, the Unity proposal largely eliminates this volatility problem.
According to Barnhart, “The current system has resulted in large annual aid variations for many cities. This has been a particular problem for northern suburbs. The Unity proposal fixes this problem.”
Rural cities rely more heavily on LGA than most metropolitan cities because of their smaller tax bases and because many rural cities serve as regional centers, drawing in people from surrounding areas to work, shop, and take advantage of city facilities such as libraries and hospitals.
“The influx of people coming into our cities creates the need for public services that is difficult for many rural cities to afford,” said Tim Flaherty, lead lobbyist for the Coalition of Greater Minnesota Cities. “The average income in greater Minnesota is much less than in the metro area. Without LGA, many of our cities would have a very hard time paying for adequate public services.”
The City Unity LGA proposal eliminates “greater Minnesota regional center aid,” which currently sends $25 million annually to larger cities outside of the metropolitan area. However, the proposal creates a new type of aid that distributes dollars to both rural and metro cities based on the concentration of jobs in each city. According to Flaherty, “the job aid portion of the city proposal helps to target aid to cities with overburden. Both rural and metro cities considered this to be a reasonable compromise.”
Of the 854 cities in Minnesota, more than 700 have populations under 5,000. There is tremendous diversity among these small cities in terms of their need for public services and their ability to pay for these services locally. LGA experts have long struggled to come up with a way of distributing aid to small cities in a way the adequately accounts for variation in the need for state assistance.
The City Unity proposal provides small cities with an additional $6 per capita per year.
“Six bucks per person per year may not seem like a lot of money,” said Dave Engstrom, Director of the Minnesota Association of Small Cities, “but it goes a long way in some of our communities. The $6 per capita increase helps to get assistance to small cities in a way that does not cost the state a lot of money.”
The $6 per capita feature of the Unity proposal comes to $4 million statewide.
In future years, the City Unity proposal adjusts the LGA appropriation annually to reflect inflation in the cost of city services.
“This is a critical feature of the new proposal and a big improvement over current law,” said Gary Carlson, Intergovernmental Director for the League of Minnesota Cities. “Inflation erodes the purchasing power of the dollar, so a frozen aid amount does less with each passing year. Over time, this forces cities to either increase property taxes, cut services, or both. Adjusting aid amounts to recognize inflation will help hold down property taxes in the future.”
In addition to providing a short-term increase in aid to cities, the Unity proposal also aims to craft a more systematic long-term reform of the LGA program that can be used to distribute aid in the next decade. Specifically, the Unity proposal calls for a study of the LGA program to be completed by 2010. The goal of this study is to examine the factors that should be used to calculate LGA and to make the goal of the LGA program more transparent and understandable to policy makers and citizens.
None of the various cities and groups of cities that crafted the Unity LGA proposal got 100 percent of what they wanted. However, by compromising they have improved the odds of halting-if not reversing-the ongoing erosion of state support for LGA, which has been detrimental to both property taxpayers and anyone who relies on city services.
With a $935 million state budget deficit, the future of the City Unity LGA proposal is far from certain. On March 26, the proposal was considered by the House Property Tax Division and laid over for possible inclusion in the Division report. A version of the City Unity proposal was included in the omnibus tax bill passed by the Senate Tax Committee on March 27. Stay tuned.