Twin Cities tax-share program receives scrutiny

Fiscal disparities plan takes money from rich cities, gives to poor - but sometimes does reverse.

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Landfall residents Christina Murray, left, and Gale Butler enjoyed some winter sun and their dogs.

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Rising impatience in tax-rich Twin Cities suburbs over a regional program that takes millions from their budgets and awards it to less affluent communities will result this week in the most intense official scutiny the plan has ever received.

A state report due out within days will examine whether the 40-year-old program known as "fiscal disparities," which quietly shifts $500 million in tax base from one community to the next, is doing what it was designed to.

While some poor communities call the program a lifeline, critics say it artificially props up tiny towns such as Landfall in Washington County and pulls large sums out of increasingly distressed suburbs, while lavishing millions upon affluent communities at the urban fringe.

And it plainly dishes out vast sums without any record of what it's used for. Is the $4 million in property value that a suburb gratefully accepts each year keeping cops on the street -- or keeping a little-used golf course afloat?

The scrutiny comes now because for a time, Bloomington -- the biggest and one of the unhappiest donors -- had one of its legislators, DFL Rep. Ann Lenczewski, chairing the key House Tax Committee.

Residents in recipient cities, she said, "get to go home to the nice quiet bedroom community and they get our tax base. They get huge checks. I have made jokes that the people of Landfall should send the people of Bloomington a letter every year saying thank you."

With far more cities gaining from the program than losing, change will pose a challenge. But it may have an effect just to hoist a little-understood mechanism into the light.

The report, to be produced by the Minnesota Department of Revenue, won't directly address all of the concerns that critics raise. But those concerns have a lot to do with why it's being done at all.

"Fiscal disparities" is frequently praised across the country as a noble effort that every big metro area should copy. Launched in 1971, it's intended to promote orderly business development and narrow the gap between haves and have-nots by spreading the wealth from the Bloomingtons and Maple Groves, ripe with commercial development, to cities with little of it.

"It makes so much sense, yet there is nothing else like this, maybe in the entire world, but certainly in the United States," said University of Wisconsin Prof. Andrew Reschovsky, speaking from the campus of Harvard University, where he's a visiting fellow at the Lincoln Institute of Land Policy.

Poorer spots call it a vital lifeline. South St. Paul has used it to plug the hole in its tax base left by the loss of its meatpacking industry. "It really left the city in a dire situation," said Josh Feldman, finance director. "The city was listed as a federal disaster area for a while."

Even some donor cities praise it. Edina Mayor Jim Hovland likes the "trickle effect from having a strong region," while Eagan Mayor Mike Maguire says it discourages tax concessions. "We're not constantly worried that Inver Grove Heights or somebody else is going to be trying to poach those businesses and that tax base," he said.

Unintended consequences

But as budgets tighten and aid dries up, questions about the program's effects and unintended side effects are growing. Among them: Lavish subsidies for tiny places that might not otherwise exist.

Landfall, in Washington County, is essentially a mobile home park with little tax base. "Most of their revenue comes from fiscal disparities rather than from their local residents," said Minnesota House Fiscal Analyst Steve Hinze. "We all think of fiscal disparities as some augmentation of the tax base as opposed to being the main part of the tax base."

This year, fiscal disparities accounts for $267,000 of Landfall's $859,000 budget while property owners paid in $285,556. "We couldn't exist without it," said City Clerk Sandy Schuebel. "We couldn't levy enough taxes on our residents to pay for everything."

If the South St. Pauls of the world are the logical beneficiaries, though, what about affluent Andover or Prior Lake, both of which receive money? Isn't that Robin Hood in reverse?

In the decades since the law was written, once-comfortable donor suburbs such as Bloomington and Burnsville have grown stressed by aging housing, roads and sewers and new populations of struggling immigrants, while former cornfields in exurban townships and remote suburbs have grown wealthy, at least in terms of their residents' incomes.

If fiscal disparities were eliminated, said Andover City Administrator Jim Dickinson, taxes on his city's average homeowner would rise by about $350. Why do they deserve that help?

When situations change

The entire region benefits, he said, as Andover hosts natural gas pipelines that fuel the metro area, protects wetlands that won't be developed and supplies workers to businesses elsewhere. "Granted, we're a winner, but we do contribute to the losers' economy."

Donor cities that have seen major demographic change object. "It's a lot of property value that goes out of here," said Burnsville Council Member Dan Gustafson. "This is not a rich community. ... We can't afford to keep shipping it off."

Economist Reschovsky, who helped develop the legislation as a grad student and testified in its defense when it was challenged in court, acknowledges today that the whole concept only gets things half-right.

"The current act only looks at the size of your tax base," he said, "and ignores the question of need. How much do you need to provide core services? Are you educating low-income people from diverse groups, or are you a homogenous upper middle-class suburb that may not need as much?"

Prior Lake, with its fancy lakeside homes, has been able to keep its tax rates lowest in Scott County while adding major amenities: a splendid city hall, an architecturally upscale fire station, a water treatment plant, lots of new parkland.

Prior Lake, said Bloomington Mayor Gene Winstead, has "a number of homes in that super upper echelon, more than our city does. Yet they're a recipient of this? And to what degree have they done a good job working to attract and get the commercial/industrial base?"

Jack Haugen, mayor during Prior Lake's building program, said fiscal disparities was "not a major piece for us, probably less than 5 percent of our total revenue. It was certainly a piece. But we were also prudent, we saved money, we had low interest rates, we had partnerships and grants."

He was more reticent on the question of the fairness of others subsidizing his city. "We just play by the rules," he said. "We don't make the rules."

With far more recipients than donors, said Edina's Hovland, "I don't think this program is ever going to go away." But money to Andover? "I don't really know if that's helping the region or not. I know it's helping in Andover, but I don't know how they're using it."

dapeterson@startribune.com • 952-746-3285 laurie.blake@startribune.com • 952-746-3287 katie.humphrey@startribune.com • 952-746-3286

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