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Focus on New Laws: Local Government Compensation Cap Repeal
City employees are no longer subject to Minnesota’s compensation limits.
Since 1983, Minnesota Statutes, section 43A.17, subdivision 9 has restricted the total compensation (salary, deferred compensation and certain benefits not provided to a majority of other full-time employees) that can be provided to city, county, and other defined local government employees. Minnesota Session Laws 2023, Chapter 62, Article 3, Section 22, signed into law on May 24, 2023, repeals the law restricting total compensation effective May 25, 2023.
Compensation cap history
Until this year’s repeal, the law limited the compensation for an employee of a political subdivision to no more than 110% of the governor’s salary in 2005, adjusted annually by an inflation adjustment. For 2023, the limit was set at $206,939 per year, beginning January 2023. The compensation limit applied to employees of statutory and home rule charter cities, counties, town, metropolitan, and regional agencies, and other political subdivisions but did not apply to employees of school districts, hospitals, clinics, or health maintenance organizations owned by a governmental unit, or to medical doctors, doctors of osteopathy and most recently, employees of the Metropolitan Airports Commission.
The compensation cap not only directly impacted specific positions requiring expertise, educational attainment, and experience, in many jurisdictions the cap also resulted in salary compression challenges for other positions below the cap. The challenges created by the compensation cap were exacerbated by the current Minnesota job market, which has roughly two job openings for every one job seeker. The cap limited the ability of Minnesota local government employers to attract highly qualified candidates from neighboring states and across the country.
Minnesota was unique among all states with this compensation limit in place. The local government compensation cap was originally enacted in 1983 and specified that compensation for local government employees was limited to 95% of the governor’s salary. In 1993, the Legislature clarified what types of compensation are to be included when comparing a political subdivision employee’s compensation to the governor’s salary. In 2005, the Legislature debated repealing the cap altogether but as a compromise, increased the cap to 110% of the governor’s 2005 salary and added an annual adjustment for inflation.
Compensation cap challenges
The law included a waiver process where a local unit of government could seek a partial waiver from Minnesota Department of Management and Budget. In order for a partial waiver to be granted, the commissioner was mandated to find that the position required special expertise necessitating a higher salary to attract or retain a qualified person. This determination included an assessment of compensation for similar positions in similar jurisdictions. However, despite the best efforts of the department to make a determination about local positions and ever-changing market factors, waivers simply could not account for the array of factors that cities and counties must consider when assembling a compensation package to effectively attract and retain qualified employees.
The existing partial waiver process was not a solution to the issues created by the cap. The partial waiver did not allow a city or county to be exempt from the cap altogether. The department’s determination became the new baseline level of compensation for the position, that would then subsequently receive an annual inflation adjustment identical to the general compensation limit. The waiver process was also time-consuming, and decisions were not well coordinated with local government hiring processes. Despite local official’s efforts to secure specific waivers, many past requests were deemed unnecessary, unneeded, or approvals were authorized below the request of the jurisdiction creating immediate challenges for city and county employers.
Effective now
Effective May 25, 2023, the statute restricting local government compensation was repealed and cities can make recruitment and retention decisions based on job requirements and current labor market conditions.