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MN2020 - LGA Increase Did What it was Supposed To
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LGA Increase Did What it was Supposed To

December 16, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Despite what conservatives say, property tax relief is on the way for thousands of Minnesota homeowners. And for the first time in a decade, those homeowners will actually be paying less for the same or more public services.  

During the 2013 session, the Legislature and Governor enacted an $80 million increase in the city Local Government Aid (LGA) appropriation to be distributed beginning in 2014, which was sufficient to replace just over half of the nominal reduction in city LGA since 2002.* This LGA increase succeeded in providing both property tax relief and an increase in funding for city services. However, some state policymakers wanted more of the LGA increase to go into property tax relief and less to go into increased spending. Their complaints about 2014 city taxing and spending decisions fail to take into account the long-term budget realities of Minnesota cities.

To some extent, 2014 LGA increases will translate into lower property taxes. The graph below compares per capita levy growth among the 682 cities that received an increase in their certified 2014 LGA relative to 2013 LGA versus the 171 cities that did not.

Graph: Change in City Levy Per Capita

Among cities that received a 2014 LGA increase, the nominal (i.e., unadjusted for inflation) per capita increase from 2013 to 2014 based on 2014 preliminary levy information will be 0.9 percent—or about half the increase among cities that received no LGA increase. In real (i.e., inflation-adjusted) dollars, per capita levies will decline by approximately 1.0 percent among cities experiencing an LGA increase, compared to a 0.3 percent decline among cities that received no increase. This indicates that the 2014 LGA increase had at least some impact in holding down city property taxes.

Furthermore, the information presented above is based on preliminary levies, which are set by local governments in the Fall. These preliminary levies can be and often are reduced, but they cannot be increased. Consequently, final certified levies are often less than preliminary levies. Over the last decade (i.e., from 2003 to 2013), final city levies have on average been 1.0 percent less than preliminary levies.

It is difficult to say how much of the 2014 LGA increase went into funding property tax relief versus increased funding for services and infrastructure because it there is no way of knowing what levies would have been in the absence of the LGA increase. However, given that the real per capita revenue base (i.e., the sum of certified levies plus general purpose state aid, including LGA) of Minnesota cities is expected to increase by 2.1 percent from 2013 to 2014 based on 2014 preliminary levies, it is clear that a substantial portion of the 2014 LGA increase was used to pay for increased city spending. Even if the final levies turn out to be one percent less than the preliminary levies—as has been typical over the last decade—the 2014 revenue base of Minnesota cities will still be 1.3 percent greater than it was in 2013.

Does this prove that cities have been profligate in the use of the 2014 LGA increase provided by the Legislature? No. In addition to the unique fiscal conditions that each city confronts, the propriety of city taxing and spending decisions should be evaluated based on long-term trends, not a one year snapshot. The graph below summarizes the trend in real per capita city revenue base from 1990 to 2014, with 2014 revenue base equal to the sum of 2014 certified LGA plus 2014 preliminary levies.

[ graph: Minneapolis City Revenue Base from 1990 to 2014 ]

From 1990 to 2002, the statewide real per capita city revenue base remained relatively constant; this was undoubtedly due in part to stable LGA funding over this period. From 2002 to 2003 and to a lesser extent in subsequent years, real per capita city revenue base declined largely in response to cuts in LGA funding. From 2002 to 2011, real per capita city revenue base fell by 15.1 percent; as a result, city services were curtailed, public employees were laid off, and investment in infrastructure dwindled.

Assuming no reduction in preliminary 2014 city levies, the increase in city revenue base from 2013 to 2014 will be sufficient to recover less than one-fifth of the decline in statewide real per capita revenue base from 2002 to 2011. Even after the 2014 preliminary levy increase, the real per capita revenue base of Minnesota cities will still be 10.7 percent less than it was in 2002. Based on data from the 2007 Census of Governments,† per capita Minnesota city expenditures were 5.5 percent below the national average, after adjusting for differences in funding responsibilities between cities in different states. Given the 2.4 percent decline in real per capita Minnesota city revenue base from 2007 to 2014, per capita Minnesota city expenditures are likely to remain below the national average in 2014.

To some extent, the 2014 LGA increase will help to hold down property taxes, although a substantial portion will undoubtedly go to restoring a portion of the decline in city revenues since 2002. This increase in city revenues is entirely defensible, given the large decline in city revenues over the last decade and the fact that the real per capita city revenue base will remain over 10 percent below the 2002 level even after the 2014 levy increase. After all, the role of elected officials is not simply to reduce taxes at all costs, but to make sure that public services and infrastructure are adequately funded.

The next article in this series will examine the recent kerfuffle regarding the 2014 preliminary levies of Minnesota counties.

 

*While the 2014 LGA increase was sufficient to restore over half the nominal aid reduction since 2002, it restored less than one-sixth of the decline in real (i.e., inflation-adjusted) dollars per capita. Trends in city aid funding are explored more fully in a September 2013 Minnesota 2020 article.

†The “Census of Governments” is published by the U.S. Census Bureau once every five years. The most recent COG for which city spending information by spending category is currently available is from 2007. City spending information by category from the 2012 COG is scheduled to be released in late 2014.
 

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