Local Government Aid Bills to Be Heard by House Panel

March 14, 2022

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Included on the agenda is a bill that would update the local government aid formula calculation of city need.

The House Property Tax Division will consider a number of local government aid (LGA) bills on March 18, including HF 4064 (Rep. Cheryl Youakim, DFL-Hopkins), which would update the LGA formula.

HF 4064 would update the LGA formula factors to reflect current fiscal and demographic information for cities. This update is based on research jointly conducted by the League of Minnesota Cities, Coalition of Greater Minnesota Cities, Metro Cities, and the Minnesota Association of Small Cities.

The bill would also increase the annual LGA appropriation by $28.2 million to $592.6 million, a 5% increase. The companion bill, SF 3971 (Sen. Matt Klein, DFL-West St. Paul), has not yet been scheduled for a hearing.

The House committee will also consider HF 3794 (Rep. Dave Lislegard, DFL-Aurora), which would increase the LGA annual appropriation by $90 million, and HF 4155 (Rep. Jerry Hertaus, R-Greenfield), which would create a minimum LGA distribution for all cities and fund the distribution with a set-aside of 2% of the total LGA appropriation, or roughly $11 million.

Background on HF 4064

The updated formula factors included in HF4064 are the result of a challenge by the House and Senate Taxes Committees last session to review the existing LGA formula factors to reflect the current fiscal and demographic status of cities. The LGA formula was last updated in 2013 after the decennial census data was released.

Based on the increasing number of cities falling off the formula, the Taxes committee chairs created a temporary one-year supplemental aid to prevent any city from losing LGA in 2022.

Throughout the fall and early winter, the four city organizations have been working with the assistance of staff from non-partisan Senate Counsel and Research, House Research, and the Department of Revenue to evaluate the current LGA formula to determine if any updating or revision of the formula would be desirable.

The work group’s initial meetings largely focused on technical analysis of the existing formula and factors used to calculate each city’s “need.” The analysis of the 2013 formula factors with updated city financial and tax base data, decennial census data and American Community Survey data indicated that the existing 2013 formula factors are no longer functioning as well to measure each city’s formula need in 2022.

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

The research focused on one set of measures that best improved the statistical strength of the formula “need” factor for the three city tiers as follows:

  • 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.

The recommendations included in HF 4064 focus primarily on the calculation of each city’s need through the multiple regression statistical technique, which has been the basis of the LGA formula since 1993. The bill does not change other existing features of the system, including the use of each city’s tax base (adjusted net tax capacity) or the guardrails that limit the reduction a city could experience in any year.

The non-partisan House of Representatives Research Department has posted a spreadsheet that provides estimates of each city’s LGA distribution under the formula revisions and the 5% appropriation increase contained in the bill.

View the House Research LGA spreadsheet (pdf)

HF 3794 and HF 4155

HF 3794 increases the LGA appropriation by $90 million but makes no changes to the underlying formula. The appropriation increase would cover approximately one-half of the difference between the current formula’s measure of total city “need” statewide and the current appropriation of $564 million.

HF 4155 would address an issue that bill author Rep. Hertaus has been working on for several years. The issue is that an increasing number of cities have dropped off the LGA formula, largely due to differences in local tax bases of cities across the state. During hearings on a similar bill in 2019, Rep Hertaus expressed that citizens in every city are contributing to the state’s tax collections, and every city should receive some assistance through the LGA system.

Under HF 4155, 2% of the existing LGA appropriation (roughly $11.2 million) would be used to establish an alternative aid calculation that the 110 cities that are “off the formula” would receive, as follows:

  • A base amount of aid equal to the lesser of $40 per capita or $60,000, plus
  • A per capita additional amount set to spend the entire 2% of the set-aside appropriation.
  • The total alternative aid would be capped at $200,000.

When an earlier version of this bill was discussed in 2019, the LGA appropriation was increased by roughly $31 million and, therefore, no city lost LGA. The current version of the bill only includes a small $592,000 appropriation increase, which appears to be a drafting error, but with that appropriation level, LGA for many cities would be reduced.

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