Time for an LGA Renaissance? (Part 2)

Is LGA the right tool for the times to ensure the health and welfare of Minnesota communities?  Several questions merit consideration.  (Second of a two-part series looking at the merits of a reinvestment in the Local Government Aid program) 

In Part 1, we discussed Local Government Aid’s (LGA) advertised purpose – property tax relief and restraint — and how history shows that these outcomes routinely fail to materialize.  The more substantive argument and justification for the program is that that every Minnesotan, no matter where they live, should have access to high quality, essential government services at affordable tax prices and LGA is needed to achieve that outcome.

Nearly 50 years of LGA has generated stories and case examples from every corner of the state about important city services whose accessibility, quality, or even existence would be challenged without state help.  It’s a compelling and persuasive narrative that easily finds its way into news reports and editorial pages.  It’s also an incomplete one.

For example, that narrative never touches on the Office of the Legislative Auditor (OLA) report two decades into the LGA program that raised serious concerns about the philosophy underlying the program –  disconnecting the responsibility for spending from the responsibility for raising revenue – and about the highly stimulative effects LGA had on city spending.  The OLA concluded at the time, “At a minimum, we recommend that the state not increase general purpose aid to cities or take on the job of preventing future city tax increases,” and “We believe a gradual reduction of aid to cities is both possible and desirable.”

Nor does that narrative capture the many political battles over determining what makes a city “needy”, the various iterations of “need”, and the resulting impacts on delivering hundreds of millions of dollars of state aid in an effective, efficient, and fiscally responsible way.  It’s a problem that once caused then-state Senator John Brandl to comment that the state could do an equally effective job by dropping money out of a helicopter.

To be sure, the problems of LGA present are not as great as those of LGA past.  A declining/dormant LGA appropriation over the past 17 years has undoubtedly helped wring any profligacy out of the LGA system.  And while the current version of the LGA distribution formula may not be ideal from an empirical perspective, its simplified and pragmatic approach has resulted (at least for now) in a level of political acceptance rare to the program’s history.

Nevertheless, these criticisms and challenges are inherent to general purpose aid programs and would likely experience a renaissance of their own in any effort to restore LGA to the “glory days” of its past.  State government has an important role to play in ensuring the health and welfare of Minnesota’s communities, but whether LGA is the right tool for these times and justifies a growing budget commitment deserves a more careful look.  Here are several questions meriting consideration:

  • What policy need, objective, or concern do our property tax refund, special refund, and senior deferral programs fail to address prompting the need for an LGA renaissance?  An alternative way to ensure necessary local services are offered at property tax prices everyone can afford would be to let cities levy as much as they need or want to and have the state step in with income-tested property tax refunds.  That way, anyone truly impacted by a real and measurable ability to pay problem – regardless of where they live in the state – gets tax relief while cities can raise the money they need.  It’s simple, accountable, efficient and – importantly – already a prominent feature of our property tax system.
  • Why is growing LGA a superior business property tax relief mechanism than simply reducing the state general levy?  One possible answer to the previous question is that businesses cannot take advantage of refund programs.  Business property taxes are a significant issue in many areas of Greater Minnesota.  Yet the largest share of business property tax burdens is the state’s significant intrusion into local tax bases, routinely making up 30%-35% of a business’ property tax bill.
  • What state general fund programs need to be subordinated to LGA protection and preservation in the future?  One of the chronic problems with LGA has been its reliability and sustainability.  Reliability is a particular problem for cities that finance ongoing operating expenses with LGA revenues when recessions create state budget deficits.  Historically, LGA has been one of the first programs legislators cut in these circumstances because the state has its own spending obligations to pay for and protect.  As competition for general fund dollars intensifies in the future due to demographic trends, it won’t take a recession to put pressure on LGA.  Prioritizing a higher LGA appropriation will inevitably require legislators to make some other unpopular choices.
  • Would categorical aids make more sense today and allow state dollars to go farther?  Categorical aids for cities with highly challenging environments for specific types of service delivery may be a way to deliver state support more efficiently and effectively.  Of particular concern is city underinvestment in essential infrastructure – a concern which State Auditor data on city spending gives some credence to.  Many smaller communities cite big-ticket capital and infrastructure needs, which can completely swamp local property tax capacity, as LGA’s most important support function.  But if the primary concern LGA serves is capital replacement and infrastructure, it would seem that a capital aid program, especially for tax base-challenged small communities, would do a more effective and efficient job of addressing those needs.  (Interestingly, a bill has been introduced this year to carve out 5% of the LGA appropriation to finance a revolving loan program for renovating rural municipal water treatment facilities while another bill seeks to require cities receiving LGA revenue through the age of housing factor in the distribution formula to dedicate that revenue to housing related programs.)
  • Should there be some concern that LGA’s distortion of local tax prices causes Minnesotans to expect local services to be delivered on the cheap?  As we noted in part 1, the property tax claim on median homestead incomes is less than it was 10 years ago but demands for relief persist.  According to the latest Department of Revenue information (for 2017), the median homestead property tax burden (after refund) in Greater Minnesota was $1,417.  Put another way, that’s $118 per month – or less than $4 a day – for all local government services – city, county, schools and all other taxing jurisdictions.  In five Greater Minnesota regions the median bill was less than $100 per month.
  • Why shouldn’t local governments embrace greater reliance on property taxation and defend it to citizens as the more progressive approach to local government finance?  According to the state’s Tax Incidence Study the local property tax is less regressive than most other taxes, including the sales tax, which is often proposed as a replacement source of income for local governments.  That is true even before applying our very generous income tested refund programs that considerably reduce the tax’s regressivity.

All these questions take on greater relevance given today’s economic and demographic realities and living in an era in which 50 cents of every new dollar of general fund revenue goes to health and human services to support those demographic realities.  State government has a role to play in making sure Minnesota’s communities are healthy, but that must involve looking to the future rather than dwelling on the past.  It’s not 1971 anymore.