“Freedom” Foundation fallacies distort LGA

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In attempt to rationalize the slashing of state aid to Minnesota cities, the so-called “Freedom Foundation” has issued a report designed to discredit the city Local Government Aid (LGA) program.  The Foundation’s analysis is a mixture of distortions, selective presentation, and outright fallacies.

The errors commence in the first paragraph of the report.  The Foundation refers to LGA as “a uniquely Minnesota form of direct aid paid to local units of government.”  In fact, several other states have programs for directing general purpose aid to cities.  Minnesota’s program is unique only insofar as it attempts to rigorously measure each city’s need for state-funded property tax relief.

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The Foundation presents an array of confused and erroneous statements regarding LGA growth and cuts.  For example:

  • The report asserts that no city lost “more than 5.25% of their LGA-derived revenues” as a result of the 2003 LGA cut.  In fact, 624 of Minnesota’s 855 cities lost over 10% and 87 cities lost 100 percent of their “LGA-derived revenue” in 2003.  Most of the cities that lost all of their LGA received little LGA to begin with.
  • The report claims that from 1999 to 2001 LGA increased by $140 million.  In fact, city LGA grew by less than one-quarter of this amount.  Furthermore, the LGA growth that did occur from 1999 to 2001 was insufficient to keep pace with inflation and population growth.
  • The report further asserts that LGA “increased more than $200 million, or 52.8%” from 1999 to 2003.  This statement is also false because it does not include the impact of the aid cuts enacted in 2003.  If we ignore the 2003 aid cuts, LGA would have grown by over $200 million.  However, the Foundation neglects to mention that between 1999 and 2003 cities lost $200 million in homestead credit aid; the LGA increase that occurred during this period was designed to replace the loss of homestead credit aid.  After the 2003 aid cuts, total real (i.e., inflation-adjusted) per capita state aids and credits to cities were 25% less than in 1999.

When examining the growth in LGA over time, it is important to take into account erosion in the purchasing power of the dollar due to inflation.  In inflation-adjusted dollars per capita, LGA has declined by 8% from 1971 (the first year of the LGA program) to 2009.  From 2002 to 2009, real per capita LGA has been cut by 41 percent.  More cuts are expected in 2010 as a result of Pawlenty’s unallotments.  A more complete description of LGA funding cuts during the Pawlenty era can be found here.  Given that LGA has declined in absolute terms and as a percent of the state’s general fund, it difficult to make sense of the Foundation’s assertion that “LGA has largely been spared the budget axe.”

The Foundation’s description of the growth in total government revenue is at best confusing.  The Foundation presents information that shows that state and local revenue as a percent of statewide personal income declined from 16.2% in FY 2000 to a projected 16.0% in FY 2011 and asserts that this information proves that “state and local government do not have a shortage of revenue.”  How does a decline in revenue as a percentage of personal income prove that state and local governments do not have a shortage of revenue?  The Foundation makes no attempt to explain this non sequitur.

Incidentally, throughout most of the 1990s total state and local government revenue in Minnesota amounted to 17 percent or more of statewide personal income—significantly higher than it is today.  During the relatively high revenue years of the 1990s, Minnesota’s economy was doing better in comparison to the rest of the nation than during the relatively low revenue years of the current decade.

The Foundation correctly notes that property taxes have increased dramatically during the current decade.  However, the growth in property taxes is not the result of increased local government budgets.  While real per capita property taxes have certainly increased over the last seven years, the amount of the increase has not been sufficient to replace cuts in state aid; consequently, property taxes have increased at the same time that the total real per capita revenue of cities, counties, and school districts has fallen.  It is state aid cuts, not growth in local government spending, that have caused property tax increases during the Pawlenty era.

The Foundation’s critique of the specifics of the LGA formula lies somewhere between the absurd and the inexplicable.  For example:

  • The report argues that the factors in the LGA formula are “arbitrary” but offers no arguments in support of this conclusion.  In fact, the LGA factors were determined using statistical tools that measure the relationship between the demographic characteristics of cities and city revenue base.  Reasonable people can disagree over the city LGA formula, but the factors in the formula are not arbitrary.
  • The report cites the fact that 91 cities receive no LGA as an indication of the “fundamental problem” with LGA.  The cities that receive no LGA fall into two categories.  The first category is cities that lost all of their LGA because of Pawlenty’s state aids cuts; this problem is not the fault of the LGA formula, but of underfunding of the formula.  The second category consists of cities that receive no aid because they have abundant local resources and relatively low revenue need; it is a sign that the LGA formula is working properly when it does not send state dollars to where they are not needed.
  • The report argues that the LGA formula has “done little to reign in LGA spending as a whole.”  This statement demonstrates a fundamental misunderstanding of the purpose of the LGA formula.  The goal of the formula is not to encourage spending or deter spending, but rather to measure each city’s need for revenue — something which it does in a logical and defensible manner.

The LGA program is not “largesse” or “welfare,” as the Foundation asserts.  LGA is public dollars used to pay for public services, distributed in a manner that directs these dollars to where they are most needed.  Most members of the legislature — both Democrats and Republicans — will correctly see the Foundation’s proposal to eliminate LGA as a recipe for massive property tax increases and rightfully reject it.

For more on the state aid system and the rationale behind it, click here.  For a discussion of some of the actual problems with the state aid system, click here.