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As cities begin planning their 2013 budgets, there are many factors to keep in mind—including state budget projections, LGA changes , homestead market value exclusion, and more.
(Published Jul 11, 2012)
Cities are beginning to plan for their 2013 budgets, and several city officials have asked the League about the reliability of the 2013 local government aid (LGA) certifications that will be sent to each city by the Department of Revenue later this month. In addition, League staff members have received inquiries about other state revenue sources such as police and fire state aid and municipal state aid (MSA).
You may find the answers to some of your questions in the League’s newly updated Budget Guide for Cities. This annual budget guide includes a variety of information to consider as you prepare your 2013 budget.
Below are a few additional or updated considerations as city officials develop a 2013 budget framework.
Although the Legislature and governor adopted a balanced budget for the 2012-2013 biennium, the future remains cloudy. Based on the end of session update to the February 2012 state budget forecast, the state general fund is expected to have a $1.047 billion deficit for the fiscal year (FY) 2014-2015 biennial budget. Many of the state aid programs that distribute funds to cities in calendar year 2013, including LGA, are paid from the state’s 2014-2015 biennial budget.
Keep in mind that although the state budget forecast includes projected growth in revenues and expenditure growth due to estimates of caseload increases such as K-12 student growth, the $1.047 billion deficit estimate does not include inflationary pressure on state expenditures. According to the state budget documents, inflation could add as much as an additional $1.058 billion in expenditure pressure over the upcoming two-year state budget cycle.
When the Legislature reconvenes next January, its major responsibility will be to craft a balanced biennial state budget. In other words, the Legislature and governor will have to close the $1.047 billion shortfall, either through expenditure reductions or revenue increases. If the 2013 Legislature opts to address a portion or the entire budget imbalance through expenditure reductions, state aid to cities payable in 2013 and 2014 could be affected.
The next state budget forecast will be released in late November or early December and it will provide revised projections for state revenues and expenditures for FY 2014-2015. However, information on revenue collections is compiled each month and these reports can provide some idea of the direction of tax collections. Since the February forecast was released, state revenue collections have exceeded forecast levels by a total of $336.4 million. Although that increase is small in terms of the entire state budget, it does suggest, at least at this time, that the upcoming state budget forecast may not report a larger future deficit.
Local government aid
As indicated in the LMC Budget Guide, the 2012 Legislature made several changes to the LGA system that will impact the 2013 distribution. The changes will alter the LGA distribution and slightly increase the total LGA appropriation.
Cities with populations of 5,000 or more will see their 2013 LGA frozen at the 2012 level. For cities under 5,000, 2013 LGA will be the greater of the city’s 2012 LGA or their formula distribution that would otherwise have been distributed in 2013. Estimates of the 2013 LGA distribution can be found at the end of the LMC 2012 Law Summaries (pdf).
The appropriation for LGA has essentially been frozen at the current level for the past several years and this level is more than $58 million below the 2007 level, and $160 million below the high water mark in 2003.
The Legislative LGA Study Group has been meeting over the last year and is required to present recommendations for reforming the distribution formula by the end of the year. The Mayors Tax Reform Advisory Group on Local Government Aid, created by Gov. Dayton, is also expected to make recommendations to the governor on LGA and other aspects of local government finance. These recommendations could be passed on to the Legislature in Gov. Dayton’s future budget proposals. Action that the 2013 Legislature takes on those recommendations could also affect future LGA payments beginning in 2014.
Police and fire state aid
These two programs are funded through dedicated tax revenues—fire state aid comes from the dedicated proceeds of the state insurance premium tax (generally 2 percent) on fire insurance while police state aid is financed by the dedicated proceeds of a 2 percent automobile insurance premium tax. The allocation formula for fire state aid generally uses population and market value information in each service area to determine aid. The allocation of police state aid is based on the number of licensed police officers employed by the entity, up to the amount of the employer’s prior year’s pension contribution.
The funding level for each of these programs has remained relatively stable over the past three years, and state budget documents show revenues for the two programs growing by approximately 2.9 percent per year over the next two years.
Municipal state aid (MSA) road funding
The overall level of funding for state aid to cities with populations of 5,000 or more has been steadily growing by an average of approximately 6 percent over the past three years. According to estimates from Minnesota Management and Budget, the overall MSA fund will continue to grow in 2013 and beyond, but at a rate of only about 2 percent per year.
Of course, those projected growth rates may not be realized due to unforeseen economic circumstances, and there is always the possibility that additional cities will eclipse the 5,000 population threshold and qualify for a distribution from the MSA system, thereby reducing the per-capita MSA distribution. Also, the needs side of the distribution can change from year to year based upon the measured construction needs of eligible cities.
Implicit price deflator
General (overall) levy limits are not in place for taxes payable in 2013. Levy limits have traditionally allowed for levy increases to cover inflationary cost increases as measured by the implicit price deflator (IPD) for state and local government consumption expenditures, and some cities still inquire about the IPD as a general measure of inflation on municipal budgets.
In addition, the IPD figure is used to adjust the state’s general property tax that applies to businesses and cabins. The current annual IPD is 2.61 percent as measured from the end of the first quarter of 2011 to the end of the first quarter of 2012.
The state’s official budget forecast also references the consumer price index for urban consumers (CPI-U). According to the February state budget forecast, inflation for the state’s fiscal year ending on June 30, 2013, is estimated to be 1.8 percent while the CPI-U for FY 2014 is estimated to be 1.9 percent.
Property tax system
The 2012 Legislature did not make any changes to the new homestead market value exclusion (HMVE) program. This program replaced the old market value homestead credit program beginning with taxes payable in 2012.
In addition, the technical HMVE clean-up bill failed to become law and, as a result, the Department of Revenue’s interpretation of statutes governing levy limitations for economic development authorities (EDAs), housing and redevelopment authorities (HRAs), and port authorities will continue to be based on market value as reduced by the new homestead market value exclusion. Similarly, the net debt limit for each city will also be computed based on the reduced market value of each city after the new homestead market value exclusion. For more information on this issue, please refer to this recent LMC article.
The legislative Property Tax Working Group is considering a wide variety of recommendations for changes to the property tax system, including reducing the number of property classifications and streamlining the property tax calendar. The group is required to make its final recommendations by the end of the year.