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MN2020 - Pawlenty's Unilateral Cuts Continue Shifting Budget Problems to Local Communities
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Pawlenty's Unilateral Cuts Continue Shifting Budget Problems to Local Communities

September 02, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

Governor Pawlenty's unilateral cuts to city Local Government Aid (LGA), the state's revenue sharing mechanism intended to keep property taxes under control, have continued a trend of balancing the state's budget problems disproportionately on the back of Minnesota's communities.  LGA has fallen precipitously since 2002, the last year of the Ventura administration.

In 2002, the statewide city LGA appropriation was $565 million and -- based on the law in place on January 1, 2003 -- was to increase to $587 million in 2003.  Lest anyone think this increase was excessive, it still would have been approximately $9 million short of what would have been needed to keep pace with inflation and population growth from 2002 to 2003.

With an impending state budget deficit, the anticipated 2003 LGA increase never materialized.  Instead, 2003 LGA was cut by $100 million relative to the 2002 level and slashed by another $27 million in the year after that.  While some reduction to LGA was necessary given the magnitude of the state's budget problem; the scale of the cuts forced deeper budget cuts and on cities than were endured by state government. This allowed Governor Pawlenty to maintain his "no new taxes" pledge while forcing local increases in regressive property taxes.

Since 2003, LGA funding has been on a roller coaster ride, although overall that roller coaster has been heading downward, particularly after the large cuts that Pawlenty imposed using his unallotment authority.  The total amount of LGA Pawlenty cut using his unallotment authority -- including the 2008 cuts plus the 2009 and 2010 cuts announced in June -- comes to just over $200 million.  Not included in this amount is the $58 million unallotment to the city homestead market value credit in 2008, 2009, and 2010; the homestead market value credit cuts affect cities that lost relatively little LGA because they received little or no LGA to begin with.

The graph below compares 2002 city LGA to 2010 LGA after the unilateral aid cuts imposed by Pawlenty.  The percentage aid loss from 2002 to 2010 is shown in (1) nominal dollars (i.e., unadjusted for inflation), (2) nominal dollars per capita, and (3) real (i.e., inflation-adjusted) dollars* per capita.


Based on cuts announced last June, real per capita city LGA in 2010 will have been cut nearly in half relative to the 2002 level.  Of course, the LGA cuts have not been evenly distributed among cities.  Click here (PDF) for a table comparing 2002, 2009, and 2010 per capita LGA (in both nominal and constant 2010 dollars) for all cities with a population over 5,000.  In this table, the 2009 and 2010 LGA amounts are equal to the 2009 and 2010 certified LGA amounts minus the 2009 and 2010 unallotments announced by Pawlenty in June.

Most Minnesota cities -- including nearly all large cities -- saw their real per capita LGA decline by over 25 percent from 2002 to 2010 after unallotment.  The graph shows the decline in real per capita LGA from 2002 to 2010 after unallotment for the two metropolitan "central cities" and the three greater Minnesota "major cities."+



The percentage cut in LGA does not tell the complete story about the LGA loss from 2002 to 2010 because some cities received very little LGA to begin.  Cities that received relatively little LGA often received a large percentage cut to their LGA, but the actual dollar per capita loss was small because their initial LGA amount was small.++  The graph below shows the per capita loss in LGA for the metro central cities and the greater Minnesota major cities in constant 2010 dollars.


The aggregate decline in statewide real per capita city LGA from 2002 to 2010 was $94.  The per capita LGA loss among each of the metro central cities and greater Minnesota major cities is well above this statewide average.  For example, the per capita aid loss in Minneapolis ($222) is more than double the statewide average.

These aid losses can be placed in context by comparing them to city revenue base (i.e., sum of levy plus state aid).  On a statewide basis, the decline in real per capita LGA from 2002 to 2010 amounts to 18 percent of the 2009 city revenue base.  (The 2010 revenue base is not yet known.)  The LGA loss as a percent of revenue base tends to be greater among larger cities.  For the five cities shown in the preceding graph, the real per capita LGA loss as a percent of 2009 revenue base ranges from 24 percent in Rochester to 31 percent in Saint Paul.

What has been the result of these aid losses, which, over the course of eight years, amount to nearly a quarter of cities' nominal LGA, nearly half of real per capita LGA, and nearly a fifth of 2009 city revenue base?  First, city budgets have shrunk significantly.  Based on estimates from Minnesota Management & Budget, total real per capita city revenue will drop 12 percent from 2002 to 2009, which is greater than the decline in state revenue even if we exclude one-time federal recovery dollars from the state budget.  This is further proof that the budget balancing measures taken by the state have hit cities harder than they have hit state government.

The second effect of large state aid cuts has been large increases in city property taxes.  From 2002 to 2009, real per capita city property taxes are estimated to increase by 13 percent.  (Without adjusting for inflation and population growth, the increase is approximately 63 percent.)  Due primarily to changes in state law, these property tax increases have fallen disproportionately on homeowners.

Incidentally, city property taxes are included in the city revenue total discussed above.  Despite a 13 percent increase in real per capita property taxes, total real per capita city revenue declined by 12 percent.  This happened because the real per capita state aid cuts far exceeded real per city property tax increases, so total real per capita city revenue declined.

The state's decision to disproportionately cut city LGA in response to the state's budget problems have caused both large reductions in funding for city services and infrastructure and large increases in city property taxes.  Pawlenty's 2009 and 2010 LGA unallotments are the most recent step down this path.  Minnesota needs a new budget path that doesn't shift the state's budget problems disproportionately to our communities and local property taxpayers.



*All inflation adjustments in this report are based on the implicit price deflator for state and local government purchases, which is the appropriate measure of inflation for state and local governments.

+Based on a classification system developed by the League of Minnesota Cities, the metropolitan "central cities" include Minneapolis and Saint Paul and the greater Minnesota "major cities" include Duluth, Rochester, and Saint Cloud.

++ There were 76 cities that (1) received LGA of less than $10 per capita in 2002 and (2) will receive no LGA in 2010 after the unallotments announced by Pawlenty.  Most of these cities are metropolitan suburbs.  These cities lost very little LGA since 2002 because their per capita LGA was very small to begin with.  While these cities did not lose much LGA, they did lose a significant portion of their market value homestead credit.  Bloomington, for example, will lose its entire $1.4 million ($16 per capita) market value homestead credit payment in 2010 as a result of the Pawlenty unallotments.

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