Mayors want LGA changes in ’14-’15 budget

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As Gov. Mark Dayton pieces together his 2014-2015 budget, he’s hearing from a bipartisan group of mayors that state lawmakers have cut their funding too deeply and too capriciously during the past decade.

Year after year, the mayors say, cities have passed budgets only to see lawmakers cut their anticipated local government aid (LGA) the following winter.

Minneapolis Mayor R.T. Rybak didn’t mince words on Monday morning at an advisory committee of mayors that’s making the case to Dayton to put LGA on a stronger — and more predictable — footing.
“The state has screwed cities,” Rybak said. “I’m going to be blunt.”

Cities in Minnesota range from urban metropolitan areas with complex transit systems to settlements that resemble postage stamps surrounded by an envelope of farmland and prairie. That variety is reflected in the composition of the 15-member Mayor’s Tax Reform Advisory Group on Local Government Aid. Its members include the two DFL Twin Cities mayors as well as St. Cloud Mayor and former GOP state Sen. Dave Kleis. The commercial might of their cities is balanced out by the involvement of mayors from small cities like Buffalo Lake’s Joyce Nyhus.

The group would be forgiven if its message to Dayton was simply to plead for more money. But in addition to concerns about the funding of LGA, they are mulling ideas to make it more stable from one year to the next. They are also advocating for alternatives to LGA such as allowing cities the option to collect local sales taxes.

Richfield Mayor Debbie Goettel said cities aren’t making the claim they should be immune from cuts when the state sprouts a large general fund budget deficit. “It’s not that we don’t ever think that we won’t be in the situation where we have to make cuts again. We do,” Goettel said. “It’s just how we go about it.”

In the 2012 legislative session, Dayton signed a technical tax bill that froze LGA for 2013 at 2012 levels for cities with more than 5,000 residents. While that meant cities wouldn’t see their LGA go down based on the complex LGA formula, it also stopped some cities from seeing sizeable LGA increases. In Brooklyn Park, the freeze amounted to $1.3 million in lost state aid payments.

Volatility of aid levels criticized

In previous sessions, LGA has been cut as part of the solution to multi-billion dollar state deficits. In 2009 Gov. Tim Pawlenty resorted to unilateral cuts to LGA, which he executed under his authority to unallot provisions in the state budget in financial crisis situations. (A court later rejected his authority to do so, but the next Legislature codified Pawlenty’s cuts.)

The recent history of LGA funding has prompted many mayors to ask lawmakers to consider changes to smooth out the volatility.

Goettel told Capitol Report that she would like to see lawmakers give six-month notices of some sort before they set their property tax levies. That way, she said, cities won’t get caught with budget gaps that can only be filled with staff or program cuts. She also suggested that state lawmakers compress the percentage by which LGA can decline or increase in a year’s time.

“That would mean that if they had to cut the budget, then a particular formula that the city had could only go down maybe 20 percent per budget cycle,” Goettel said. “Or vice versa, it could only go up 10 or 20 percent as well. If you put caps on the ends and stepped everybody down, we could deal with that a lot easier, especially if we got a heads-up six months ahead.”

The proposals that reduce the volatility of LGA are controversial to the extent that they seek to rein in the Legislature’s power of the purse. House Taxes Chairman Greg Davids, R-Preston, who is a supporter of LGA in a caucus with many members who oppose it in its current form, said some reforms might not fly.

“In theory, that sounds wonderful,” Davids said. “The only problem is one Legislature cannot bind a future Legislature. So we can’t go more than two years out. On the other hand, I don’t know if it would be a good idea anyway. I think cities need to come before the state Legislature to justify local government aid.”

Northfield Mayor Mary Rossing came into office on Jan. 1, 2009, as the nation was heading into recession amid the Wall Street implosion and residential real estate crash. She shares Goettel’s interest in setting iron-clad expectations for LGA funding. She is also among several mayors who think the state should open up opportunities for cities to keep a portion of the sales tax generated by local businesses without coming before the Legislature each time to seek approval.

“One thing they could do is give cities a small taste of the sales tax on the front end,” Rossing said. “The only thing we can do now is a local option sales tax.… What if you could expand that so that you can do a local option sales tax for infrastructure?”

Local sales tax powers proposed

Before the LGA system was created, sales taxes were a source of financial support to cities. In 1968 the state began distributing a quarter of sales taxes to local governments. But that was eliminated with the enactment in 1971 of the Minnesota Miracle, when lawmakers created the LGA system and prohibited both local sales and income taxes.

There are 24 cities and counties that have succeeded in getting legislative exemptions for a local option sales tax. The most recent were authorized in 2011 for Hutchinson and Lanesboro. In addition, six cities in the St. Cloud area have banded together on a sales tax.

Some legislators who focus on property tax issues, like Rep. Paul Marquart, DFL-Dilworth, the lead DFLer on the House Property and Local Tax Division, object to sales taxes for local government because it erodes the philosophy behind LGA that tax disparities between wealthy and poor communities should be smoothed out. A sales tax focus raises equity issues between cities that do and don’t have significant volume of retail sales.

But in recent years local governments have made the pitch, with some success, that they should be able to grab some sales tax revenue to pay for capital projects of regional significance. The logic used by regional centers like Kleis’s St. Cloud is that their properties, like convention centers and parks, are used by people who don’t live in the city and thus don’t pay property taxes.

That policy approach was at the heart of a proposal by Davids and Senate Taxes Chair Julianne Ortman, R-Chanhassen, in 2011 to allow local governments to impose a sales tax of up to one half of 1 percent without state approval. The sales tax revenue, which would require a local referendum, would be limited to capital projects like civic centers, libraries, police stations and flood control. DFL Senate Minority Leader Tom Bakk, who is a former Taxes Committee chair, signed on as a co-author. The bill, however, failed to make it out of Ortman’s own committee.

Gary Carlson, the director of intergovernmental relations at the League of Minnesota Cities, said the movement to inject the sales tax into the tax policy discussion at the Capitol is probably not going to abate anytime soon.

“With the erosion of the appropriation for LGA,” Carlson said, “there are more cities that are looking at other ways to raise their own revenues. And the sales tax has become a more obvious alternative for some cities.”