State expects half of LGA increase to ease property taxes

It used to be that when Minnesota cities received an increase in state money under the Local Government Aid program, they would use two-thirds of it to keep local property taxes down.

But under increasing pressure in the past few years, cities have been putting only about half the LGA increases in property tax relief. Instead, they spent more on city services like police and street maintenance.

That was the conclusion of a group of legislative and Department of Revenue analysts who worked on Gov. Mark Dayton's proposal to add $80 million a year to the program starting in 2014. (For a look at how the plan affects metro and outstate cities differently, go here.)

So if the past few years offer a prediction, it would be that the $80 million annual state spending increase would result in $40 million in local property tax relief.

What actually happens will depends on what hundreds of city councils decide when the next local budgets roll around, but the recent trend makes sense. Cities have been under increasing pressure to cut services in recent years. Streets have gone unfixed; parks get mowed less; even police departments have been cut back. So it's not surprising that recession-hit cities would feel pressure to spend any new money on keeping those services up rather than passing it along to local property taxpayers.

The LGA program has been unreliable in recent years as lawmakers saved money by not delivering on promises after city budgets were set. So a lot of cities directed the money they did receive to one-time expenses instead of lasting property tax relief.

Perhaps the other main point to be made about the governor's proposed LGA increase involves a new formula that shifts money toward Minneapolis, St. Paul and their inner suburbs. Among them, they would see about half of the increase. Many outstate cities would get an increase in aid in 2014 but then revert back to levels closer to what they are currently receiving.

Eric Willette, property tax research director, and Steve Peterson, director of tax policy research, at the Department of Revenue explained in a phone call Thursday that the new emphasis was intentional, an effort to bring back some balance that had been lost in recent years. Those metro cities spend a lot on basic services like public safety and streets, a need the new formula tries to take into account, Willette and Peterson said.

The two were part of a group of state analysts that produced the new formula, based on recommendations from a group of 15 Minnesota mayors. The goal, they said, was to simplify the formula, make it more stable and distribute the money better.

"If it's not reliable," Willette said, "it's hard to use it as (property) tax relief." In the past, city officials uncertain about how much money they would receive tended to put it into one-time capital expenditures instead of a temporary tax break for property owners.

Not everyone is a fan of the new formula. Mankato city manager Pat Hentges, whose city would see an increase in 2014 but then lose most of that increase in ensuing years, said the city would "absolutely" consider property tax relief. But he said the shift of money toward metro cities "makes no sense." He would have preferred that a $500 property tax rebate that is another part of Dayton's tax plan be put into the city aid for more lasting property tax help.

Sen. Rod Skoe, DFL-Clearbrook, chairman of the Senate Taxes Committee, said he worries the formula may be too narrow when it bases a city's amount of LGA on public safety and street needs. Cities' need to spend on airports, parks, libraries and other services also should figure into the formula, he said.

Another shift in the proposed formula deals with aging housing. It used to be cities got credit if they contain lots of houses built before 1940 on the theory that those places had more old infrastructure that needs fixing. The new formula shifts the year to 1970, meaning suburbs with post World War 2 housing get more money; Skoe expressed the concern that older cities with far older infrastructure still need more help.

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