When the administration announced the cuts to the current budget on December 19, the Local Governmental Aid program (LGA)– revenue sharing program with cities-took a disproportionate share of the cuts. Even though the LGA program is only about 3% of the state budget, the program accounted for 23% of the cuts on December 19.
There has been a great deal of debate surrounding this program over the past several years. Questions included is distribution equitable, is the program too volatile, could the formula be improved? City officials from throughout the State of Minnesota including the North Metro Mayors Association agree that reform is needed. Indeed, reform is underway based upon 2008 legislation. The basic fact is that the program is structured to address two problems facing many cities. These are first, revenues available to cities (defined as property tax base) vary dramatically from city to city; and second, the spending needs of cities also vary dramatically. Not all cities are alike; nor are all suburbs wealthy! The purpose of the LGA program is to account for these differences and city overburdens, so citizens across the State of Minnesota receive public services without paying exorbitant property taxes to get them.
With respect to the differing levels of property tax base, within the metropolitan area alone there currently would be a difference of more than 6.5 to 1 in the ability of cities with populations greater than 2,500 to raise revenues on a per capita basis using the same property tax rate if it were not for the existence of the fiscal disparities program. Even with the fiscal disparities program there is still a difference of over 5.4 to 1 difference in the ability to raise revenues. Clearly not all cities are created equal in terms of their ability to raise revenues from the property tax. At the same time spending needs of cities vary dramatically-often due to the age of the city. What constitutes “spending need” is debatable. However, the current formula does provide a measure using the age of housing and other demographic factors as surrogates for “spending need.” Within the metropolitan area “spending need” varies by almost 3 to 1. In plain English the per capital spending need for the highest city is almost three times that of the lowest city. While this formula can be improved it cannot erase a gap that is this large.
The fact of life at the municipal level is that ability to raise revenues varies greatly as does the spending need facing cities. The rapid demographic changes occurring in our society will only exacerbate these challenges. Often within a city a low tax base is due to older housing and older, often obsolete commercial/industrial buildings. These same factors drive spending needs higher than in other cities. Unless a program such as LGA existed there would be pockets of cities with high tax rates supplying few services while in other portions of the metro area there would be cities offering a full range of services at a low property tax rate. This rather quickly turns into income segregation, which leads to a host of other problems. Further, studies of other metropolitan areas have concluded that when such disparities exist within a metropolitan area the growth rate for the entire area is negatively affected. Neighboring cities have experienced a simple fact of life – city borders do not operate to halt problems at the boundary.
While debates have occurred over what constitutes “basic public services” one fact is clear: Since 2003 cities as a whole have reduced their per capita spending by 11.3% (this takes into account inflation). While all local governments in the state (including counties and schools) have also reduced spending over this time period this reduction by cities leads the way. It is also striking when compared to the 2.9% increase in retained State government revenue over the same time period!
Cities all across the Sate of Minnesota are responsible for providing public service for citizens, services which are often provided so seamlessly that many don’t notice-services such as police and fire protection, clean drinking water, plowed streets and the like. Their elected officials stand before the public at election time as well. The LGA program remains a critical revenue source for many of our communities. Local units of government recognize that all must be a part of solving the State’s Budget Crisis. They, however, should not have accounted for such a disproportionate share of the cuts in December. Nor should they suffer a similar fate as the State moves forward in addressing the next biennium budget crisis. A “balanced approach” should be the target for all who must deal with this most difficult decision.