MCFE Submission to LGA Study Group
In 2008, the Minnesota Legislature established the Local Government Aid Study Group to examine the current system of aids to local governments and make recommendations on improvements to the system. Below is the MCFE’s submission to the LGA study group in late 2011 on the programs goals, objectives, strategies, and improvements.
Recommendations of the MCFE to the LGA Study Group
December 28, 2011
Following, for your consideration, are our thoughts and
recommendations regarding the goals and objectives of the LGA program as well
as our rationale behind them. We appreciate the opportunity to offer these ideas for your
consideration and would welcome the opportunity to discuss them further.
1. The public policy goal of LGA should be to assure that all
Minnesotans, regardless of where they live, have access to important local public
services at affordable tax prices.
Importantly, it should not be to equalize tax bases – that confuses
tactics with policy purpose.
- “Important” local services should be defined as essential to
the general health and welfare of local citizens. One of the important features of local
government is its ability to calibrate local citizens’ expectations of the type
and level of public services with their willingness to pay for them. The state should not use LGA to “equalize” access
to all public amenities and services across communities.
- “Affordable” tax prices should be evaluated on the basis of
effective property tax rates expressed as a percentage of taxpayer income. Effective tax rates expressed as a percentage
of property value is an inferior and often misleading measure of ability to pay
taxes.
2. MCFE believes it is also critical to place LGA in its
appropriate context. LGA is just one
part of a very large property tax aids and credits system. In light of projected future budget circumstances,
achieving the policy goal stated above in the most cost effective and efficient
way possible is essential. Income-based refund
programs that allow cities full freedom to levy based on citizens’ needs but
targets relief based on ability to pay is the most direct and efficient way to
achieve this policy objective. Therefore,
MCFE believes the circuit breaker program should be the primary avenue for addressing
this policy goal. The state should
consider LGA a supplemental strategy attending to policy aspects that
income-based refund programs address either insufficiently or inadequately.
3. LGA in its current form faces two major problems
- Inability to accurately assess the “neediness” of cities. Distribution formulas heavily influence
whether LGA is an economically justifiable program or an inefficient use of
taxpayer dollars. Any justifiable
formula must reasonably assess a city’s need as well as its revenue raising ability. However, Minnesota doesn’t currently assess city
need well, and the state has never done this well. Most importantly, both politics and empirical
challenges functionally prevent us from ever doing this well.
- Distortion of local tax prices and cost structures. LGA can distort local tax prices resulting in
public acceptance of local cost structures that citizens would otherwise find
objectionable. Department of Revenue
data and national studies both show Minnesota homeowners often have very
affordable property tax burdens in both absolute and relative terms. Juxtaposing this finding with the recurring
claim that Minnesotans are at the tolerable threshold of property taxation suggests
another legacy of LGA may be that many Minnesotans have been conditioned to
believe local services should be offered to them below reasonable cost.
4. To correct for these problems while delivering on the overarching
policy goal, the objective of the LGA program should be oriented toward
equalizing capacity for essential capital investments and infrastructure rather
than the current operations of government.
This approach offers three distinct advantages:
- First, State Auditor data suggests that capital spending is where
the primary need actually exists. Aggregate
current operating expenditures for city government are up over the last decade
in both nominal and inflation-adjusted dollars.
Inflation-adjusted spending in public safety, housing and economic
development, and parks and recreation are up robustly (over 20%) in a decade featuring
two major recessions. Capital spending,
however, has declined substantially suggesting essential infrastructure
investments are being squeezed by higher operating expenditures. Frequent testimony by local officials before
the Legislature on LGA underscores the need for state assistance supporting
essential infrastructure.
- Second, the state can deliver capital equalization aid on a simple
tax capacity basis and extricate itself from incomprehensible and flawed
regression-based models attempting to measure “city neediness.”
- Third, no significant spending tails or unsustainable cost
structures are created by this type of aid.
Rather, capital aid -- much of which is likely to address maintenance or
replacement needs -- offers the prospect of some local savings.
Concerning this third bullet, MCFE strongly believes policymakers
must recognize the omnipresent potential of current LGA design to advance
private interests operating within government over the public interest. As the Brandl/Weber Agenda for Reform stated
15 years ago:
“Private economic interests (in government) sometimes conflict
with the public interest on matters of pay, accountability, assignment of
personnel, on whether to introduce innovations that could accomplish more work
at lower expense, and on whether the interests of government employees
themselves are to be put first, as opposed to the citizens of the state.”
Despite a legitimate public policy purpose, existing LGA can
intensify this conflict by having state taxpayers subsidize local cost
structures and reduce motivation and incentive for spending redesign and
mandate reform affecting city operations.