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LGA seen as big issue; lawmakers poised to look at tax reform

BEMIDJI – This upcoming legislative session could be an important one for Minnesota cities.

The Legislature is poised to look at tax reform after it convenes Tuesday, a discussion that city leaders hope includes changes to how the state supports cities.

Cities across the state collected $425 million in Local Government Aid last year. That program could see some reforms after years of funding reductions that cities say have forced property tax increases and cuts to services.

The LGA formula uses a variety of factors to compare a city’s needs versus its ability to raise revenue. The program was created out of a package of tax reforms generally referred to as the “Minnesota Miracle” in the 1970s.

The formula has been adjusted over the years, but some say it should be changed again.

“We are definitely pushing for a formula that recognizes the different abilities of cities to raise revenues and the different needs within the cities,” said Amanda Duerr, a lobbyist with the Coalition of Greater Minnesota Cities. “The formula definitely needs to address the fact that all cities are different.”

In Bemidji’s case, more than half of the market value is tax-exempt due to the presence of non-profits, hospitals, universities and other public buildings, making it difficult to raise money through property taxes without raising rates significantly. That unique situation is not directly addressed in the LGA formula.

Bemidji Mayor-elect Rita Albrecht is hopeful that any reform would leave the city with at least as much as the $2.9 million it received in LGA last year.

In a letter to the Star Tribune that she co-authored last month, Albrecht called on the state to re-examine its relationship with cities.

“In the 2013 legislative session, lawmakers and the governor should work earnestly to restore LGA funding and reform the LGA distribution formula in a fair way,” the letter reads.

Appetite for reform?

Gov. Mark Dayton’s administration has been looking at tax reform, which could include proposals to adjust the LGA system.

“LGA is one of many elements of tax reform that will be addressed in the governor’s upcoming budget,” Bob Hume, a Dayton spokesman, wrote in an email.

Meanwhile, the LGA study group made up of lawmakers and city officials presented recommendations to the Legislature last month. Those recommendations include increasing stability and simplicity to the formula.

Rod Skoe, DFL-Clearbrook and chair of the Senate Tax Committee, said minor tweaks could be looked at, but stopped short of saying the program needed a major overhaul.

“The biggest problem with the LGA formula is that it hasn’t been fully funded,” Skoe said, adding that property tax relief will be a major point of discussion this year. “I think the idea of LGA is good and we’ll try to make the formula the best that it can be and the most fair for all communities.”

Funding cuts

Cities were expecting $587 million in LGA in 2003, a payment that has been regularly cut to last year’s total of $425 million, according to the League of Minnesota Cities. Duerr said the CGMC is pushing for another $100 million in LGA.

LGA reductions over the past decade have forced many cities to either cut services or find other ways to fund them. Cities also commonly blame LGA cuts for rising property taxes.

In Bemidji, state aid and property taxes each make up about a third of the city’s 2013 general fund.

In 2003, LGA made up about 51 percent of the budget. This year, it will be 29 percent of the city’s budget.

In that same time, Bemidji has grown more reliant on property taxes.  

City finance director Ron Eischens said cuts to LGA have meant the city has had to cut back in several areas, including full-time employees and overtime pay, and raise revenue elsewhere.

Bemidji’s property tax levy has increased by about 235 percent since 2000, but some of that increase is due to infrastructure improvements like the Law Enforcement Center lease, Sanford Center bonds and annual street improvements.

Eischens said the current LGA formula doesn’t completely address Bemidji’s need because it doesn’t take into account the tax exempt property.

“To me, that’s our biggest challenge,” Eischens said.

John Hageman

John Hageman covers North Dakota politics from the Forum News Service bureau in Bismarck. He attended the University of Minnesota in the Twin Cities, where he studied journalism and political science, and he previously worked at the Grand Forks Herald and Bemidji Pioneer.  

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