The LGA Mess

In his first official veto letter, Governor Mark Dayton noted his objection to the legislature’s proposed cuts to Local Government Aid to cities and counties. Specifically, he repeated his often-mentioned comment that cuts in LGA simply force local governments to increase property taxes; a tax perceived by many as more regressive than other state-collected taxes. On the other hand, proponents of the LGA cuts accurately note that the State of Minnesota is broke and that there was nothing in the bill that requires local governments to raise property taxes. And so the debate continues … Of course the truth is that both sides are right; and like much political rhetoric, there is more interest and concern about “being right” than actually fixing the problem.

Actually, it’s too bad that many legislators today were not around at the establishment of Local Government Aid, nor do they seem interested in a history lesson. For if they were, they would see the similarities in the arguments being made today as they were 40 years ago. LGA was first established in the early 1970s as a key component of what has often been called the Minnesota Miracle of 1971. A decade in the making, the legislation was a response to a wide variety of concerns regarding state and local financing of government and educational services. But foremost in the legislators’ minds was property tax relief. For you see, by the 1960s it was obvious that Minnesota was becoming a patchwork of “property tax rich” and “property tax poor” communities. These inequities led legislators to think about ways to equalize funding to ensure that some level of basic services could be provided through means other than just local property tax revenues.

However, another factor seldom mentioned was the desire of state legislators to prohibit local governments from establishing their own local sales, income or other taxes. In fact in many states local sales and even income taxes were not at all unusual. But here in Minnesota, the perception was that if local governments established these additional taxes, the revenue inequities across communities would likely increase – not decrease. Accordingly, these and a variety of other concerns culminated in the early 70’s to establish a system of state aid that had three core components:

1. A significant increase in state-levied taxes, primarily through sales and income tax revenues;

2. The establishment of a state aid formula to local governments, which reduced inequities by augmenting local property tax revenues; and

3. A prohibition of local governments establishing their own sales and tax revenues without legislative consent. Of course today virtually all of Minnesota’s metro communities now have their own dedicated sales tax … but that’s another story.

Over the subsequent 40 years the LGA formula has been modified a few times, however the general consequence has been mostly to continually increase state aid to local communities, thereby making many communities more and more dependent upon LGA to fund city services. This was especially true in the 1990s. As a result today, for some communities LGA could comprise up to, or even more than half of their general fund budget. And while such a situation puts a community financially at great risk as they now face these proposed cuts, let’s remember that it was state officials, not city or county governments that created this system. As one city administrator from west-central Minnesota candidly questioned, “Why did the state keep giving us more and more LGA?”

So here we are today. After years of creating a dependence of local governments on state aid, the LGA cuts over the past few years, as well as the proposed cuts have quite predictably led to increased local property tax levies. After all, it’s the only consistent source of revenue the legislature allowed local governments to have.

But of course the real question is what do we do now? So here are three things I hope our legislators might consider:

1. First, legislators need to realize that there are some core services that the state needs to ensure all Minnesotans have local access to. Accordingly, LGA should not go away, but rather it should be targeted to those defined core services.

2. Second, local governments need to be slowly weaned off their dependence on LGA. However, this will need to be deliberate, strategic and take some time. Drastically cutting LGA as a way to erase a budget deficit will only lead to higher property taxes and greater fiscal inequities across Minnesota.

3. And finally, legislators need to remember that part of the deal creating LGA was the prohibition of levying local sales and income taxes. If legislators are so quick to cut off LGA, are they equally prepared to unshackle local governments on the types of tax revenues they can collect? It’s time to look before you leap.