Time for An LGA Renaissance? (Part 1)

As interest in rejuvenating state Local Government Aid picks up steam, history shows a primary objective – delivering property tax relief – is likely to run headlong into the "Ventura Law of Local Finance".   (First of a two-part series looking at the merits of a reinvestment in the Local Government Aid program) 

Political issues and arguments never die; they’re only recycled.  There is no better example of this than the perennial debate over state support for cities, which is once again in the news.  According to a Star Tribune report, Governor Walz will include a $30 million boost to Local Government Aid (LGA) in his forthcoming budget.  This increase would bring the appropriation back to its previous highest level – $565 million – which occurred way back in 2002. 

Property tax relief is once again the heart and soul of the message.  The news report notes legislators “created the program as a way to drive down property taxes,” and highlights the fact that city property tax levies have increased 123% since LGA reached its highpoint 17 years ago.  It also includes comments from a couple of local officials suggesting that restoring LGA to its historical high should only be a starting point – presumably because rising costs for local government services are creating unsustainable property tax burdens.

This vibe of property tax stress needs to be reconciled with the just-released Department of Revenue Residential Homestead Property Tax Burden Report (“Voss Report”), which shows that property taxes after refunds consume a smaller percentage of the median homestead income in both the metro area and Greater Minnesota than they did ten years ago when the first report was released.  Be that as it may, it’s still important to take a close look at a bigger issue: what kind of property tax relief can taxpayers expect from a renewed state focus on LGA financing, and how might it restrain future property tax growth?

Since that 2002 appropriation amount has become sort of a fiscal talisman in LGA debates – and in the spirit of recycling – we reprise our own analysis from several years ago examining the context and circumstances leading up to the 2002 LGA appropriation and its aftermath:

Among other things, Governor Ventura’s “Big Plan” wiped out the mandatory $1.3 billion general education levy, which lowered property tax bills across the state. The table below shows city property tax levies and the amount cities received from two aid programs (LGA and HACA) for the years leading up to the adoption of the “Big Plan” and the year immediately afterward.

So what happened? The first thing to notice is the relationship between LGA and city levies in the years leading up to the Big Plan. Despite reasonable annual growth in LGA (ranging from 2.5% to 4.3% from 1996-2001), levy increases during these economic boom years still increased at a very healthy average annual clip of 5.8%. This alone should cast some doubt on the notion that local aids restrain levy growth and indirectly provide property tax relief. In the language of public finance scholars, it’s strong circumstantial evidence of the “flypaper effect” – money sticks where it lands.

Even more telling are cities’ levy decisions following the adoption of the Big Plan. As part of the reform, the state eliminated a big pool of local aid (HACA). The state partially offset the $200 million cities lost in HACA aid with a $157 million increase in LGA (explaining the 38.4% jump in 2002). The net result was that cities needed to backfill a net loss of $43 million in state aid, which undoubtedly influenced city levy decisions for 2002.

Was the big 17.4 % increase in city levies in 2002 justified by the aid cuts alone? Nope. As the right-most column in the table shows, the change in levy-plus-aid between 2001 and 2002 – a measure of the change in city revenue base – was 7.6%. That’s 78% higher than the average of the six previous years.

Was inflation running amok requiring bigger levies to keep up? Hardly. Cities’ levy-plus-aid growth during this period far exceeded inflation (measured by either the Consumer Price Index or the specialized government inflation measure called the IPD). From 1995-2001 cumulative levy-plus-aid grew 39% faster than the IPD and 75% faster than the CPI.

So what explains this big jump in city levies? Evidence strongly suggests that – even after several years of strong levy growth in a modest inflation environment – cities simply took advantage of the new “spare capacity” on business and homeowner property tax bills created by the elimination of the general education levy to support higher spending...

We have come to call this the “Ventura Law of Local Finance” – after any state effort to buy down property taxes for one type of local government (cities, schools, etc.), other local governments will undercut the results by filling much of that newly-emptied space with their own higher taxes.  (As the Walz administration appears to be contemplating another major takeover of local education funding, “Ventura Law” should most definitely factor into their long-term LGA plans.)

In the grand scheme of the state budget a $30 million increase in LGA is not a big deal.  And it’s certainly true that this new money would help cities that are feeling real pressures from increasing demands for services, inflation, and unattended to capital needs.  But some important questions need to be asked in determining whether this program deserves the type of increasing investment and renaissance many are seeking in light of past experiences, the realities of current local property tax prices, and perhaps above all the state’s need to pay for its own obligations.  We’ll look at those questions in Part 2.