Initial Research on LGA Formula Indicates the Need for an Update

February 22, 2022

The League and other city organizations have been analyzing the local government aid formula, which hasn’t been updated since 2013.

The League of Minnesota Cities, Coalition of Greater Minnesota Cities, Metro Cities, and the Minnesota Association of Small Cities have been working together to evaluate the current local government aid (LGA) formula to determine if any updating or revision of the formula would be desirable.

The research effort, which began last fall, was requested by key legislators at the end of the 2021 legislative session. The formula was last fully updated in 2013, and since that time, a growing number of cities have experienced losses of aid or have fallen off the formula. The city groups have been doing their research with the assistance of staff from the non-partisan Senate Counsel and Research, House Research, and the Department of Revenue.

The work group’s initial meetings largely focused on technical analysis of the existing formula and factors used to calculate each city’s “need.” They analyzed the 2013 formula factors with updated city financial and tax base data, decennial census data, and American Community Survey data. This analysis indicated that the existing formula factors are no longer functioning as well to measure each city’s formula need.

Current LGA formula

Under the current formula, the “need” for cities is computed using the following factors:

  • Cities under 2,500 in population:
    • Each city’s population size.
  • Cities between 2,500 and 9,999 in population:
    • The percent of housing built before 1940;
    • Household size;
    • The population decline percentage since the peak population level of the last 40 years;
    • A population sparsity adjustment for all cities with fewer than 30 residents per square mile.
  • Cities 10,000 and higher in population:
    • The average number of jobs per capita;
    • The percent of housing built before 1940;
    • The percent of housing built between 1940 and 1970;
    • A sparsity adjustment for cities with fewer than 150 residents per square mile.

Analysis of the existing formula with updated data showed that some of these factors had less statistical significance in showing city spending patterns than with historic data.

Proposed new formula

The research then turned to identifying and testing new or updated factors to improve the statistical strength of the formula to measure each city’s formula need factors. The effort included the statistical evaluation of more than 40 potential variables.

At this time, the need calculation is the only part of the program that has been examined for potential changes. Revising other mechanisms of the program, such as the division of cities into three groups based on population size for purposes of calculating aid and the limits on year-to-year changes in LGA payment, are not part of this analysis.

The statistical research suggests updating the need calculations for the three city tiers using the following factors:

  • Cities under 2,500 in population:
    • Logarithm of population, which allows the elimination of the existing $610 per capita cap on LGA.
  • Cities 2,500 to 9,999 in population:
    • The percent of housing built before 1940.
    • The population decline percentage since the peak population level of the last 40 years.
    • The percentage of tax base classified as commercial, industrial, and public utility.
    • The average adjusted net tax capacity for cities in the tier.
  • Cities 10,000 and higher in population:
    • The percent of housing built before 1940;
    • The population decline percentage since the peak population level of the last 40 years;
    • The percentage of tax base classified as commercial, industrial, and public utility;
    • The percent of population age 65 or older;
    • The average adjusted net tax capacity for cities in the tier.

Legislative outlook on LGA changes

The work group has begun sharing the research with key legislators. If there is legislative interest in considering the findings and recommendations, the city groups may be asked to share the findings in future legislative hearings.

During the 2013 formula review, the Legislature used recommendations developed by a similar work group as the basis for a formula update. The Legislature also provided an $80 million increase in the appropriation for LGA partially to restore funding cuts enacted in the early 2000s, but also to aid in the transition to the updated formula.

The LGA appropriation for 2022 is back at the 2002 funding level, after several years of deep cuts. An increase this session would assist cities with budget and inflation pressures, while also aiding in the implementation of an updated formula.

For more background information about this topic, read a previous article.

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