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Supplemental Budget Cuts: Your Questions Answered on City LGA and MVHC

What cuts to city aids and credits can you expect in 2010 and 2011? Get answers to your frequently asked questions.
(Published Apr 7, 2010)

(Updated Jul 1, 2010)

Note: The League has received numerous inquiries about the supplemental budget cuts. This article clarifies the impact of (1) the original governor's unallotment reductions (now ratified) and (2) the supplemental budget cuts. We have discussed these questions with House staff and Department of Revenue staff for accuracy.

On April 1, Gov. Pawlenty signed the first supplemental budget bill, Chapter 215 (HF 1671), into law. For cities, the new law contains $52.5 million in city market value homestead credit (MVHC) and local government aid (LGA) cuts for the 2010 distribution. For 2010, this is the first time since 1990 that cities have been cut twice in one calendar year—first under the governor's unallotments announced last July (ratified in May) and now under the Legislature's supplemental budget. The bill also reduces city aid and credit distributions for 2011 by $56.5 million. To clarify, the supplemental cuts are in addition to the now-ratified unallotment cuts.

Impact of court ruling on unallotment
The Minnesota Supreme Court ruled against Gov. Pawlenty on May 5 in the unallotment lawsuit. The Court upheld the lower court’s ruling that the governor exceeded his budget unallotment authority when he made cuts to the Minnesota Supplemental Aid-Special Diet program. A majority of the Court concluded that the manner in which the governor exercised the unallotment authority was not permitted by the statute. While the decision only directly affected the cuts to the dietary aid program, the Legislature convened during a special session on May 17 and passed Chapter 1, ratifying the bulk of the unallotments including those to LGA and MVHC. These ratified unallotment cuts are identical to the governor’s unallotments.

Future cuts to city programs a possibility
The state budget forecast will be updated in late November or early December. If that forecast shows a state budget deficit for the remainder of the 2010-2011 biennium (which will end on June 30, 2011), it is possible that the governor could address it through an additional unallotment that could include 2010 city programs.

For 2011, the estimates of the impact of the cuts are based on the most reliable current information, but keep in mind that these are only estimates. Perhaps a bigger concern for cities is the fact that the state is facing an estimated deficit of almost $6 billion for the 2012-2013 biennium, which is the biennial budget from which 2011 and 2012 city aids and credits are paid. It is possible that the 2011 Legislature could balance that deficit through additional cuts to a wide array of state general fund programs—possibly including the 2011 and 2012 LGA and MVHC distributions.

Your questions answered
Below is a list of frequently asked questions about the state aid and credit cuts.

Q: How are the supplemental 2010 cuts calculated?
A: The 2010 reduction for each city is computed as the lesser of (1) 3.4287 percent of the city’s certified 2010 property tax levy plus its original certified LGA and taconite aid or (2) $28 per capita using the city’s 2008 population.

Q: Will the cuts apply to small cities?
A: Unlike the now-ratified unallotment reductions, the supplemental cuts will be applied to ALL cities, regardless of city size. (Under the governor's original 2009 and 2010 unallotments (now ratified), cities under 1,000 population with a property tax base below $1,157 per capita were exempt from the cuts.)

Q: How are the cuts apportioned between LGA and MVHC?
A: The calculated reduction will first be taken from the city’s MVHC reimbursement and then, to the extent necessary, from the city’s LGA distribution. In the past, city cuts have generally been taken first from LGA and then to the extent necessary from MVHC. The order of the cut has no impact on the total cut any city will experience. However, by cutting MVHC first instead of LGA, the majority of the first half of the 2010 reduction will occur in late October when the first half of MVHC is distributed instead of late July, when the first half of LGA is distributed.

Q: My city has a separate levy for our Housing and Redevelopment Authority (HRA). The HRA levy receives a portion of the total MVHC. Is the HRA MVHC distribution affected by the cuts?
A: Separately certified levies, for example, those for HRAs, Economic Development Authorities (EDAs) and port authorities are not affected by the MVHC reductions. However, if levies for these functions are included in the city’s certified levy, MVHC apportioned to those amounts would be subject to the MVHC cut.

Q: Will the cuts apply to other state aids such as police and fire pension aids?
A: The calculated cuts for 2010 only apply to MVHC and LGA, and will be evenly split between the October and December MVHC payments and then to the extent necessary to the July and December LGA payments.

Q: Does the new law extend levy limits beyond 2011?
A: The bill does not include any extension of levy limits as proposed by the governor. Under current law, levy limits will be in place for one more year (taxes payable in 2011). Cities covered by levy limits (those over 2,500 population) will be able to recover their loss of 2010 LGA and MVHC under both the ratified unallotment reductions and the supplemental budget cuts through a special levy in 2011. In addition, cities that are scheduled to lose MVHC in 2011 will be able to also declare a special levy for that loss in 2011. For cities that experience a reduction in LGA in 2011, the Department of Revenue’s levy limitation should automatically increase to reflect the loss of state aid in 2011. LGA amounts for 2011 will be certified by July 31, 2010.

Q: Will we receive an official notice of the additional cuts from the Department of Revenue?
A: According to the Minnesota Department of Revenue, there has been no official decision about whether the department will distribute an official announcement to each city of the impact of the 2010 cuts. This is due in part to the fact that the state will not have final information on the amount of 2010 MVHC each city will receive until later this summer. In fact, without the final certified MVHC figures for cities, the final impact of even the ratified 2010 unallotments will not be fully known for all cities until later this summer. However, official estimates of the supplemental 2010 and 2011 cuts have been posted by the House of Representatives on the House Research Department website. These estimates are based on final city, county, school, and special property tax levies and generally should be a fairly accurate estimate of the final certified cuts.

Q: What happened to the governor’s proposed supplemental budget cuts?
A: The House Research Department spreadsheet includes an estimate of the governor's supplemental cut recommendations in columns 3 and 5. These cuts DID NOT become law under the recently enacted bill and are provided for comparison purposes only.

Q: Is the House Research Department spreadsheet for 2010 based on final LGA and MVHC amounts?
A: The House Research Department spreadsheet includes final certified 2010 LGA figures but the supplemental cuts for 2010 are based on MVHC estimates and as a result, if your city still receives LGA, the final apportionment of the supplemental cut between MVHC and LGA could change when the final MVHC distributions are known.

Q: How can I determine how the cut to my city is split between LGA and MVHC? The House Research spreadsheet just shows the total cut amount.
A: The League has prepared a spreadsheet that shows the losses to LGA and MVHC for 2010 as well as estimates for 2011 for each city. The spreadsheet shows changes in city LGA and MVHC separately. Both the supplemental cuts and now-ratified unallotment losses, if any, are shown for each. Remember that the supplemental cuts are taken from a city’s MVHC payment first and then, to the extent necessary, from its LGA distribution.

Q: How can I determine the total 2010 cut to my city?
A: On the House Research 2010 spreadsheet, the total estimated cut to each city under the 2010 now-ratified unallotments and the supplemental budget can be computed by adding columns 2 and 4. The total 2010 estimated cut is shown on the LMC spreadsheet under the column titled, “Estimated Total 2010 LGA/MVHC supp & unallot cuts.” The estimated total amount that the city can expect to receive in 2010 is shown in the next column over.

Q: How are the 2011 cuts determined?
A: The new law will increase the city cut to $56.5 million for the 2011 distributions of MVHC and LGA but the allocation of the cut to individual cities is distinctly different than the 2010 supplemental cut. The MVHC cut for 2011 is an extension of the governor's original 2010 unallotment reductions, which totaled approximately $25 million—but does NOT include the supplemental 2010 MVHC reduction. The LGA portion of the reduction is implemented through a permanent appropriation reduction from the current law $558 million level to $527.1 million, or roughly a cut of $31 million. Unlike the MVHC cuts that are an extension of the 2010 unallotment cuts (now ratified) to affected cities, the LGA cut is distributed through the formula with adjustments on the allowable annual increases and decreases.

Q: How accurate are the 2011 LGA figures?
A: The estimates for the 2011 LGA distribution are preliminary estimates and are subject to changes as final LGA formula factors are compiled.

Q: Comparing Column (1) in the House Research 2010 spreadsheet and Column (1) on the House Research 2011 spreadsheet, it looks like we will be receiving less LGA. How accurate is column (1) on the 2011 Proposal?
A: As discussed above, the 2011 LGA distributions are preliminary estimates and may change once formula factors are finalized. Please keep in mind that Column (1) on the 2010 House Research spreadsheet shows the combined certified LGA and MVHC amount for 2010 while only the estimated certified LGA amount is shown for 2011. Again, the League has created a single spreadsheet in an attempt to simplify differences in the layout of the 2010 and 2011 House Research spreadsheets.

Q. It appears that the cut for 2011 is lighter for my city than the 2010 cuts. Is this accurate?
A. For many cities, the 2011 cut will be less than the total 2010 cut. Keep in mind that the governor’s 2010 unallotments (now ratified) reduced city programs by $128 million while the supplemental budget reduced 2010 city programs by another $52.5 million. In comparison, the current total 2011 cut is $56.5 million.

Q: Why don’t the 2011 spreadsheets show MVHC for all cities?
A: Without 2011 certified levies or updated information on property values, any estimate of 2011 MVHC would be very preliminary. The MVHC reduction figures are based on the 2010 unallotment cuts (now ratified) and are estimates of the 20110 MVHC cuts for the affected cities. A city with an “NA” listed has not had an MVHC reimbursement reduction under current law.

Q: My city is listed as having a 2011 MVHC cut. What if my city’s 2011 MVHC amount changes?
A: For some cities, the amount listed on the House Research Department 2011 spreadsheet may not reflect the actual 2011 MVHC cut an individual city may experience. The new law will extend the final, actual 2010 now-ratified unallotment reduction to 2011. The amounts on the House Research Department and LMC spreadsheets are still estimates of the 2010 MVHC cuts. In other words, if your city’s final MVHC cut for 2010 increases above the amount on the spreadsheets, your 2011 cut will also increase by the same amount.

Q: My city only lost LGA under the governor’s 2010 unallotment (now ratified), but my city lost MVHC under the supplemental budget cut. Will we lose MVHC in 2011, too?
A: No. The supplemental MVHC cuts for 2011 are an extension of the now-ratified 2010 unallotment reductions to MVHC and not the supplemental 2010 cuts that were applied first to each city’s MVHC. The LGA reduction is accomplished by reducing the total appropriation and then distributing the amount through the LGA formula.

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