Local Government Aid 101

Information Memo

Published: August 15, 2023

Overview of the local government aid program

The Legislature created the first local government aid (LGA) program in 1971. Since then, LGA has undergone many changes — some minor and some bringing about significant reforms.

View a yearly legislative history of local government aid to cities

The 2023 Legislature increased the total appropriation by $80 million up to $644 million for aids payable in 2024 and beyond. The Legislature also made some changes to the formula used for distributing funds.

Formula basics

The state determines a city’s share of the LGA distribution using a complex formula that compares a city’s expenditure need to its ability to pay.

Each city’s expenditure need is measured based on several statistical variables. These variables, or factors, try to identify characteristics that cause differences in the amount cities spend to provide the same level of service. Then, the calculated expenditure need is compared to the city’s ability to pay. This difference, or gap, is the city’s unmet need.

A city’s LGA payment is a percentage of that gap. The percentage of the gap funded by LGA is based on the total available appropriation for the program and is the same for all cities that receive LGA in that year.

Expenditure need variables

Current law reflects three need formulas for cities (Minn. Stat. 477A):

1. Cities below 2,500 in population

For cities below 2,500 in population, need is defined by:

  • A city population size factor.
  • A sparsity adjustment for all cities under 10,000 in population with fewer than 30 residents per square mile.

2. Cities between 2,500 and 10,000 in population

For cities between 2,500 and 10,000 in population, need is defined by:

  • Percent of housing built before 1940.
  • Population decline (%) since the peak population level of the last 40 years.
  • Share of tax base that is commercial-industrial.

3. Cities over 10,000 in population

For cities over 10,000 in population, need is defined by the:

  • Percent of housing built before 1940.
  • Share of tax base that is commercial-industrial.
  • Population decline (%) since the peak population level of the last 40 years.
  • Age index (ratio of over age 65 to total population).

Calculating unmet need

To calculate a city’s need, the values for each variable are multiplied by fixed coefficients. These coefficients were determined by a statistical process called multiple regression.

The coefficients weigh the variables by their relative importance in explaining differences in city spending need. The sum of these products is a per capita dollar expenditure need.

Multiplying the per capita need by the population gives the total expenditure need, which is then compared to an individual city’s ability to pay.

The ability to pay is a city’s capacity to raise revenue via property taxes. This is calculated by applying the statewide average city tax rate based on the prior year’s levy to the city’s tax base. The difference between a city’s total expenditure need and its ability to pay is its unmet need. The portion of unmet need filled by LGA is adjusted so that the total of all distributions equals the current appropriation.

See League resources on paying for city services

Year-to-year changes

A city’s LGA payment amount can change from year to year.

View current and historical local government aid certification amounts on the state’s website

Timing of payments

The Department of Revenue notifies cities of their LGA amounts for the following year by July 31. Cities receive the aid in two equal payments. The first payment comes in mid-July and the second comes in late December.

Cities can request early payments of LGA when they face certain unanticipated costs, such as those for recovery efforts after a natural disaster.