The history of Local Government Aid

 An ever changing program

Throughout the history of the LGA program, there have been many changes to the program’s formula, distribution and popularity. Even so, one thing has remained constant: LGA has been good for Minnesota communities.

The program started in 1971 as part of the “Minnesota Miracle” and replaced several smaller “tax sharing” programs that previously divide up other taxes, such as inheritance, cigarette and mortgage registration taxes. As a trade off, a prohibition on local sales and income taxes was instituted.

The original goals of the program, according to a House Research presentation, were to provide property tax relief and ensure sufficient revenue for local government needs. The program did not contain language restricting it to any types of service, and instead focused on general need. In fact, the first LGA formula illustrated how much trust the state had in local officials to spend their aid wisely. The first formula distributed aid to the counties on a per person basis. The counties then redistributed the aid to its local governments based on their share of the previous year’s property tax levy. Under the original formula, cities that had a higher levy were deemed to have higher needs and therefore received more aid.

The formula changed for the first time in 1976 to include a measurement of tax base when the distribution within a county changed to be based on an equalized mill rate. In 1980, the formula began to take the shape of our current formula when aid was distributed on a fiscal need minus fiscal capacity (or effort) basis and the aid came directly from the state, not the county. During this period, a three year rolling average of a city’s levy was the measurement for need, and fiscal capacity was equalized assessed property values (tax base). The formula remained this way until 1989.

In 1989, a major change occurred in LGA calculations: fiscal need would no longer be directly tied to a city’s levy and instead would be measured by population, city location and growth. Fiscal capacity would continue to be based on tax base.

In 1994, the factors used to measure fiscal need changed once again and were determined statistically by the League of Minnesota Cities. Also, up until this point in LGA history, a city could never receive less than what it had received in the prior year. This changed in 1994 so that cities would receive what they got in 1993, but increases above that were fully on the LGA formula.

The formula remained the same until 2003 when another round of reforms occurred. First, the need measurements were updated with new statistically determined factors. The grandfather that guaranteed every city the same amount received in 1993 was removed. The formula also became more complicated. Regional center aid was added. An offset for Taconite Aid was included on the fiscal capacity side of the formula. Caps on increases and decreases were added to offset the increased volatility created by removing the grandfathers.

Since 2003, the formula has had several changes. The formula has added additional need measurements, removed the Taconite Aid offset and started a two-year average of data to further reduce volatility.

History of the LGA Formula 

Click to enlarge

Click to enlarge

 
The LGA formula has come a long way, from a simple formula that trusted local officials to “do the right thing” but linked city spending to aid increases, to a complex formula that tries to balance the different needs and tax bases of cities across the state without encouraging extra spending. At the heart of the program is the desire for Minnesota residents to have access to quality city services regardless of their geographic location, strains on a city or tax base.

For more information on the history of LGA, watch House Research’s presentation in front of the House Property Tax Division here.

CGMC priorities funded in governor’s bonding proposal

Last week, Gov. Dayton unveiled a $531 million bonding proposal to improve public buildings and address flooding, roads, bridges and several other issues. Included in the governor’s proposal is funding for three CGMC legislative priorities:

  1. Greater Minnesota Business Development Public Infrastructure Grant: $4 million. The BDPI grant, created in 2003, provides up to 50 percent of capital costs related to industrial park development and associated job creation in greater Minnesota. This funding is provided on a competitive basis through DEED.
  2. Local Road Improvement Fund Grants: $10 million. The Local Road Improvement Fund provides bonding dollars for paying the costs of constructing or reconstructing city streets, county highways or town roads.
  3. Greater Minnesota Transit Assistance: $2.5 million. This program funds capital transit projects in greater Minnesota. The funding allocated by the governor is designated for facilities in Rochester, St. Cloud and Mankato.

If you have any questions on these economic development initiatives, please contact J.D. Burton at jdburton@flaherty-hood.com.

Reminder: RSVP to CGMC Legislative Action Day

Join city officials from across the state for CGMC’s annual Legislative Action Day, which will be held Wednesday, February 9. Each year, mayors, city council members and city staff from greater Minnesota meet in St. Paul to discuss important policy issues for the session and visit with their local legislators at the Capitol. At night, you are invited to join our members in a more casual setting at Mancini’s Char House for dinner and mingling. A social hour will start at 5:30 p.m. with dinner being served at 6:30 p.m. The cost of dinner is $24 and can be paid at the event. If you are able to attend, please RSVP to Colleen Millard at cfmillard@flaherty-hood.com or 651-259-1914.