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Gov. Dayton's budget proposal includes a significant reform to the LGA program for the 2014-2015 biennium.
(Published Jan 28, 2013)
In his budget recommendations released on Jan. 22, Gov. Dayton proposed an appropriation increase and significant reforms to the local government aid (LGA) program for the 2014-2015 biennium. If enacted, the changes would start affecting city aid payments in 2014.
The governor is not proposing changes for the LGA distribution scheduled for July and December of 2013.
The Department of Revenue (DOR) has released city-by-city estimates for LGA payment amounts in 2014 as compared to current law.
Much of the current LGA formula would be discarded under the governor's proposal. One element of the current distribution system that does remain is the comparison between a city's “capacity” and its “need.” The governor does not propose changing how capacity is calculated. It would still be the city’s adjusted net tax capacity (tax base) multiplied by the statewide average city tax rate.
Each city’s need would be computed using an entirely new formula that includes three need factors:
The formula would give each city a foundation need of $200 per capita. This is based on a statistical analysis of the average city spending per capita on public safety and streets. A city gets additional need from this factor above the $200 base need based on its population size.
The second need factor is the percentage of housing built before 1970 in each city. For each percentage point of pre-1970 housing, a city receives an increase in need of $1.30 per capita up to a maximum of $130 per capita.
The third factor is the percentage of parcels in each city that are tax-exempt. The governor’s proposed formula defines a parcel as tax-exempt if it is not city-owned and it contains at least one structure valued at $5,000 or more. For each percentage point, a city gets $65 per capita of need up to a maximum of $130 per capita.
The per capita dollars of need for each of the three factors are added together to arrive at the city’s total per capita need. The formula then compares total per capita need multiplied by the city’s population to the city’s capacity just like it does in current law. If there is a gap between need and capacity, the city receives LGA. If capacity exceeds need, the city will not receive LGA.
One of the governor’s main stated goals in constructing this new formula is year-to-year stability. The population factor is the only need factor that is adjusted annually. This will minimize the year-to-year volatility in aid amounts.
Other formula changes to note
Another main goal of Gov. Dayton’s proposal, according to the budget documents, is to simplify the LGA system. With only three need factors and no adjustments based on special aid bases, the budget document suggests that calculations are easier to understand. In addition, several of the complexities of the current formula, including the current aid bases (e.g., small cities aid base, jobs aid base, regional center aid base) are eliminated under the proposed system.
Gov. Dayton also includes several transition mechanisms. There will be a provision to limit year-to-year changes in LGA payments to no more than $10 per capita. Decreases in year-to-year LGA are limited to $300,000 for all cities. These caps are similar to what is in place under current law.
The governor is also recommending adding $80 million a year to the LGA program, bringing it to about $506 million each year. In the first year of this new system (2014), the $80 million would be used as follows: The 729 cities certified to receive aid in 2013 would receive $30 per capita in additional aid in 2014. Beyond 2014, the additional $80 million will be distributed through the new formula.
League staff are examining the governor’s LGA proposals and the budget as a whole. Read the League’s Cities Bulletin and Third Reading for more details and updates. The League will also present a webinar on Gov. Dayton’s budget recommendations on Feb. 1.
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