Steven Dornfeld: Local government aid -- counterpoint

(Note: For another perspective, read John Stone's essay.)

Commentary

Republican state lawmakers have proposed slashing the 40-year-old program of state aid to Minnesota cities, while DFL Gov. Mark Dayton wants to preserve the status quo.

Nobody seems to be talking about a more thoughtful and constructive option -- redesigning the program to make it more equitable, efficient and effective.

Policymakers would be wise to dust off a 1991 study led by Helen Ladd, a professor of economics and public policy at Duke University.

That study found Minnesota's aid to cities was distributed largely on the basis of historical spending patterns and was "not well directed to the cities that need help the most."

The Ladd study said the state could design an aid formula that cost less money but did a better job of reducing the gap between cities' needs for essential services and their ability to finance these services through local property taxes.

State lawmakers have tinkered with the local government aid formula several times in the years since the Ladd study. However, the aid tends to go to the same cities -- primarily those in greater Minnesota.

So what's wrong with this venerable program?

1. LGA has fostered inequities among cities, rather than reducing them.

For many outstate cities, LGA accounts for 50 percent, 60 percent or more of their annual operating budgets. In 2008, state aid to one tiny outstate community totaled 115 percent of its expenditures, according to state Revenue Department figures.

Meanwhile, apart of Minneapolis and St. Paul, most metro-area communities receive little or no state aid.

Why this difference? It's not because most outstate cities have a greater property tax burden or because their residents have lower incomes.

The median property tax burden for homeowners in greater Minnesota is 2.3 percent of income, while in the metro area it is 3.19 percent, according to the Revenue Department.

In many outstate communities, homeowners pay less for police, fire, street maintenance and other municipal services than they do for cable television.

Nonetheless, House Republicans would exacerbate the current inequities by phasing out aid to the central cities by 2014 and the suburbs by 2012, while preserving aid to the outstate cities. (Senate Republicans have not yet provided details about their proposed LGA cuts.)

2. LGA has been ineffective in holding down local property taxes.

Between 1986 and 2001, state aid to cities more than doubled. Nonetheless, local property taxes shot up more than 70 percent during this same period. Despite infusions of new state aid virtually every year, local property tax levies declined just once during that 15-year period.

In the last decade, as a result of the state's budget shortfalls, lawmakers were forced to cut state aid to cities several times. Whether local officials did all they could to tighten their belts and share the state's budget pain is questionable.

History has shown that LGA is the most costly and inefficient way of restraining local property taxes.

The most fair and effective way of delivering property tax relief is through the state's property tax refund program, which provides relief directly to taxpayers with lower incomes and disproportionately high property taxes.

3. LGA does nothing to encourage governmental efficiency.

Local officials have little incentive to be fiscally prudent when they have large pots of money to spend without having to justify it to local taxpayers. Why exercise budgetary restraint when you can send most of the bill to St. Paul?

Lawmakers would be wise to reexamine the LGA program, as well as county general purpose aids, to determine whether they are properly designed to achieve their intended purposes.

However, why not go a step further and use some of the money as incentives to promote regional and shared delivery of local services?

Minnesota has no shortage of local units of government -- 3,526 in all. They include 87 counties, 854 cities and 1,788 townships. Our state ranks ninth in the nation in local government units per 10,000 population.

The boundaries for many of these political jurisdictions date back to the horse-and-buggy era.

The populations of 57 counties are smaller than the city of Richfield. Minnesota has way too many small and overlapping jurisdictions providing law enforcement, emergency services, street maintenance, libraries, parks and recreation.

With the state budget shortfalls likely for years to come, preserving the status quo is not an option. As public policy analyst Ted Kolderie has observed, Minnesota's grim fiscal outlook "cries out for a major effort to find ways to meet public needs more imaginatively and more productively."

Steven Dornfeld is a former newspaper writer and editor and former public affairs director for the Metropolitan Council.

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