The Free Press, Mankato, MN

January 25, 2013

New proposed LGA formula good for some cities, bad for others

By Mark Fischenich
The Free Press

MANKATO — All Minnesota cities eligible for state aid payments would see substantial increases in 2014 under Gov. Mark Dayton's proposed budget, but in 2018 a new distribution formula would kick in and produce winners and losers.

The winners list includes older Twin Cities suburbs, the state's largest cities and the vast majority of the 15 cities whose mayors served on a special advisory group that recommended the formula change.

"It just doesn't make sense," said Mankato City Manager Pat Hentges. "The governor should be complimented for budgeting this (increase in LGA). I'm just concerned about the formula."

Hentges said city officials are still awaiting the details of the new distribution formula. But looking at projections of how the change would impact state payments to every city in the state, he said it appears to make winners of Minneapolis and St. Paul and the older suburbs closest to the core cities.

Hentges pointed to the suburb he managed before coming to Mankato. Columbia Heights will receive $46 from the state this year for each of its 20,000 residents. In 2018, that would have risen to $50 per capita under the existing funding pool and formula. Under the new formula, Columbia Heights would get $116 per capita -- a nearly $1.3 million jump.

Hentges said he wouldn't suggest that older suburbs don't need the increase, but he's not sure why the new formula would provide such a substantial hike for some while leaving other deserving cities with much less.

Ups and downs

Many Minnesota cities -- and their homeowners, too -- could find themselves on a state-aid roller coaster in the next few years after suffering steep plunges in payments over the past decade as the state struggled with recurring budget shortfalls.

Payments to all cities eligible for Local Government Aid would shoot up in 2014 as Dayton proposes adding $80 million to the existing $426 million pot for LGA, a program that attempts to ease property tax burdens in cities with low property wealth and/or higher than average demand  for municipal services.

Then in 2018, the new distribution formula would take effect and drop LGA payments back to current levels for many cities.

Others would see the big increase next year decline a bit by 2018 but still stay well above current payment amounts.

And a few -- including Waterville, Eagle Lake, Le Center and Gaylord -- might wish they never got on board. That's because, after the 2014 increase, they'll see their aid drop  below the level it would have been at under the old formula.

Le Center's per capita aid would be $51 lower in 2018 under Dayton's plan, with Mapleton ($12 less per capita), Gaylord ($19 lower) and Waterville ($15 less) also doing worse compared to the status quo.

Winners are scattered throughout the gamut of cities. Butterfield (a small rural Watonwan County town), St. Clair (a bedroom community south of Mankato) and Northfield (a college town just south of the metro area)  would each see a $70 jump in LGA per capita in 2018 compared to this year.

Regional centers tend to be losers, Hentges said. Not all of them, though. Rochester, which receives just $47 per capita this year, would jump to $83 in 2018. Duluth's 2013 aid of $318 per resident would rise to $334 in five years.

St. Paul's per capita LGA would rise $63 from current levels by 2018, and Minneapolis' would climb $27.

Mankato actually ends up exactly where it left off under the plan -- $157 in state aid for every resident in 2013, $157 per capita after the new formula is in place in five years. North Mankato and many other cities in the area will drop $10 per capita under the new formula, compared to payments this year.

Formulating need

Hentges believes the proposed formula largely abandons the traditional purpose of LGA -- to help cities with limited property wealth provide similar services as cities that have a more prosperous tax base.

Steve Peterson of the Minnesota Department of Revenue said the new formula continues to have a component that aims more aid to cities with a smaller tax base. But the formula drops many of the factors from the complex current formula in an effort to make state aid more comprehensible and predictable.

"It was more of a matter of simplifying, making it more understandable and making it more stable," said Peterson, director of tax policy research for the department.

The new formula has three primary factors, rather than seven in the old one. One component attempts to aim additional state help for public safety and roads to cities with larger populations. Another element provides more aid to cities with higher amounts of tax exempt property. The third looks at the percentage of housing built before 1970, which tends to correlate to higher poverty and higher public safety demands.

St. Peter City Administrator Todd Prafke appreciates the special attention the new formula gives to cities with a lot of tax exempt properties, such as colleges, churches, government facilities and non-profit organizations. A third or more of the valuation of the property in St. Peter -- home to Gustavus Adolphus College and the Minnesota Regional Treatment Center -- is tax exempt.

Those facilities, and the people who live and work there, still require city services, Prafke said.

"It's an important thing for the formula to recognize," Prafke said.

Advice and argument

The governor's formula comes out of the recommendations of The Tax Reform Advisory Group for Local Government Aid, a panel of 15 Minnesota mayors appointed by the governor to look at whether the formula should be adjusted. The group held a series of meetings around the state during 2012 before presenting its suggestions to Dayton in December.

Of the 15 cities whose mayors served on the panel, 13 will do better in 2018 and beyond if the new formula is adopted -- 10 of them substantially better. The average increase in state aid per capita for the 15 cities would be $35 -- nearly double the $18 average increase statewide.

Whether that formula is adopted will be determined by the Legislature in negotiations with the governor. Hentges said he expects the leaders of the House and Senate tax committees to each develop a formula of their own.

"So we'll probably have dueling formulas," he said.

And Prafke has little doubt that city leaders from around the state will be lobbying for the formula that serves their city best.

"This is such a  difficult discussion because cities throughout Minnesota don't all face the same issues," he said, "and they aren't all of the same ilk."