Minnesota Lawyer
LMC’s chief lobbyist says sales-tax exemption, LGA reform were historic
From where Gary Carlson sits, the 2013 legislative session proved to be more beneficial to the city governments for which he lobbies than he dared hope when the session began five months ago.
Local governments had grown accustomed to seeing state lawmakers cut financial support to solve a string of deficits in the last decade. With lawmakers facing with a $627 million general fund shortfall for 2014-2015, only the sunniest of optimists would have expected lawmakers to dip into state coffers in multiple ways to benefit cities. But in the end Carlson, the director of inter-governmental relations at the League of Minnesota Cities (LMC), would look back on the session that ended May 20 as one of the most important in his more than 30 years of lobbying.
The marquee accomplishment involves local government aid (LGA) reforms and funding increases, which were the result of legislators’ prodding the League and other city lobbying associations to put aside their differences and reach a deal on a new aid formula. That formula will extend LGA to suburbs with aging housing stock that haven’t been eligible for the program in the past. The deal won support from greater Minnesota cities in part because it was accompanied by $80 million in increased LGA for the biennium.
As if the most significant LGA legislation in decades wasn’t enough of a win for cities, lawmakers also were persuaded to exempt cities and counties from the state sales tax. In an interview with Capitol Report on Wednesday, Carlson discussed some of the backstory on how these things came to pass and their meaning for Minnesota cities’ finances.
Capitol Report: Tell me about the significance of the 2013 legislative session for cities.
Gary Carlson: I think it was very significant in several respects. It seemed like city financing became quite a big issue over the last couple of years. A lot of legislators on both sides of the aisle were looking at ways to stem the loss of monies and the rise of property taxes. So this year, obviously, LGA reform and the appropriation increase — and the sales-tax exemption that was created by the Legislature — [were] very significant pieces of legislation for cities across the state.
I still remember the hearing in the Senate where Sen. [Ann] Rest asked me, [regarding] the LGA reform proposal and the sales-tax exemption: “Which one would cities prefer?” And I said, “Well, to be honest, we think they are both very, very good policies.” I really at that time did not think that there was a chance that both would become law.
CR: With regard to the LGA reform that was made, state law now contains different ways for determining a city’s need for LGA. What’s the biggest factor for determining a city’s need that’s been added to the law?
Carlson: Previously, there were basically two categories of cities — cities under 2,500 population and cities over 2,500 population. The new formula uses a three-tier system — cities under 2,500, cities between 2,500 and 10,000 population, and cities over 10,000. In the statistical analyses we did this year, it remains that the percentage of pre-1940s housing stock is highly correlated with levels of city spending. That was one of the bases upon which we have determined the need factors for cities.
Age of housing stock does indicate all sorts of characteristics of the city — the age of the infrastructure. One of the things we knew in advance is that older cities tend to have a high percentage of tax-exempt property. That is one of those concepts that many legislators seem to seize upon: If a city has a lot of tax-exempt property because the state has deemed the property to be exempt, we really should think of ways to help compensate those cities or help them pay for the services they provide. Although we didn’t use a direct measure of tax-exempt property because of some of the deficiencies in measuring that, we do know there is a high correlation in measuring older housing and the number of schools, churches and government buildings in those communities.
CR: In my experience following these issues at the Legislature, LGA is obviously a big issue. The sales-tax exemption is not something you hear as prominently mentioned. How long have local governments been pushing to get exempted from the sales tax?
Carlson: It goes back to the 1992 legislative session. The Legislature was facing a budget shortfall at that time. They talked about doing fairly deep cuts in local government aid, and what was ultimately decided by the Legislature and the governor was to impose a sales tax on cities, counties and townships. That way, there would be some impact on all of those local units of government rather than simply taking it out of the LGA program, which predominately went to cities.
At that time, as I recall, the fiscal note was that it raised an estimated $66 million per year in revenue from cities, counties and townships that went into the state’s general fund. And over the years, that amount has grown rather significantly. The most recent tax expenditure budget for the state suggests that the total cost to the cities and counties — townships were exempted in 2011 — was just about $150 million per year. So it had grown rather substantially from the 1992 session. More and more, it has been an aggravation for cities that they have to pay the sales tax, because it does raise local costs for everything from buying road salt to doing a street reconstruction project.
It became a more acute issue this year when the governor first proposed his budget. He proposed extending the sales tax to a broader array of services. We know that a lot of our cities are heavy consumers of services such as accounting and legal costs, actuarial costs, engineering, architectural services and so forth. And when he proposed that in his budget back in January, a lot of our cities started looking at that and said, “Man, this is really going to increase our liability.”
So we decided to approach a number of legislators and ask if they would be interested in introducing the exemption legislation once again. We got a good bipartisan mix of legislators to introduce bills and, lo and behold, the Senate really seized upon it as a major reform initiative and included it in their bill.
CR: So even after the governor took the B2B sales-tax expansion off the table, the exemption of local governments on their sales-tax liability remained?
Carlson: Yes. I think it became a light-bulb issue for some legislators that this doesn’t make sense.… The other issue is, in the 2011 special session tax bill that was passed, the Legislature decided to exempt townships from the sales tax. I think that was a key factor in this whole discussion – that schools and townships were exempt, but cities and counties were not. That little chip at the sales tax at the local level was certainly a factor in legislators discussing the need for having city and county exemptions.
CR: Was there anything that passed this session that will have adverse effects on cities’ budgets? I recall there was concern about the potential costs from the labor/business compromise on workers compensation.
Carlson: We’ll watch very closely what happens with the workers comp expansion to post-traumatic stress claims. That is one of those unknown factors that could have an impact on cities down the road. We’re going to pay very close attention to see if there is any need to tighten that language at all.
CR: Are there any sleeper issues that were important for cities, aside from LGA and the sales-tax exemption?
Carlson: On the pension front, we spent a lot of time trying to get a solution to the local government police and fire system. Back in 2010 we made some significant changes to try to shore up the general local government pension plan in the Public Employee Retirement Association. I think most people feel that that was very successful legislation. Even though it was challenged by some of the retirees, ultimately the courts found that it was a legal and balanced plan.
So this year one of the challenges was to go and find some solutions to the police and fire plan. Frankly, we were very pleased as representatives of the employers, the cities and counties, to see the [police officer and firefighters associations] actually come forward with some concessions, some benefit reductions to help solve the problem. That was indeed a big step in the right direction. The ultimate compromise includes employer contributions increases, employee contribution increases, and retiree benefit reductions. But I think in the end, it will be viewed as certainly a significant piece of legislation that will rein in some of the costs and hopefully balance those pension commitments into the future.
