As Duluth struggles with less state aid, some criticize using it

• Don Ness

Duluth Mayor Don Ness (Photo courtesy of the City of Duluth)

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• Local government aid paid to Duluth

After a decade of uncertainty, Duluth Mayor Don Ness is looking to Gov. Mark Dayton and a new Democratic-controlled Legislature to deliver more-predictable state support to cities in coming years.

Since 2003, the city of Duluth has seen the state money it receives through local government aid fall victim to budget-cutting.

Not only has the state cut LGA, but in five of the past 10 years the city has received less than the budgeted amount, forcing painful last-minute adjustments that resulted in staffing cuts, reduced services, new fees and higher taxes.

The situation has made it hard for the city to make solid financial plans, said David Montgomery, Duluth’s chief administrative officer.

“We’ve had to make late adjustments because they kept whacking the amounts,” Montgomery said. “So a lot of plans have had to be put on hold, and we had to eat all the inflationary costs.”

The city has reduced its overall staffing by more than 5 percent in recent years. But Peg Spehar, Duluth’s chief financial officer, said that excluding public safety jobs — essentially people in police and fire protection roles — one in five city positions has been eliminated.

“Our staffing has suffered dramatically,” she said.

Duluth isn’t the only city to feel the sting. Local government aid payments cities expected to receive in 2011 were cut by more than $100 million after a state government shutdown, and those payments remained frozen this year.

“Local government aid has taken a lot of hits in recent years,” said Gary Carlson, intergovernmental relations director for the League of Minnesota Cities. He described LGA as an “almost constant” target as the state struggled to balance its budget.

Hit where it hurts

Duluth has been particularly sensitive to the cuts, as it relies on LGA for 37 percent of its total revenue, making the state the city’s largest single source of money. Duluth City Council President Dan Hartman said the city would need to more than double its existing local property taxes to make up for LGA if it were ever eliminated.

“Another way to look at this is: If we were to lose all our local government aid, it would be like losing our police and fire departments entirely,” he said. “That’s how much it represents.”

Duluth City Councilor Jim Stauber contends Duluth would be wise to wean itself from its diet of state aid.

“It’s my belief that we need to become less dependent on that state trough and more dependent on our own local resources that the state doesn’t have control over,” he said, “because two years from now, who knows what the Legislature might do or look like or who may be in power.

“I think the city would be better off to rely on its own resources, whether it’s property taxes or sales taxes or payments in lieu of taxes or fees and permitting fees,” Stauber said.

Phil Krinkie, a director of the Taxpayers League of Minnesota, a Republican from Shoreview who served 16 years in the Minnesota House, said Duluth’s heavy reliance on LGA illustrates one of the fundamental problems with the program.

“You have a real problem for cities that are so dependent on state aid that it’s supplying a majority or a substantial portion of their budget, and they really can’t function without it. It’s not what it (LGA) was intended to do, and it’s unfortunate that the Legislature has allowed or has continued a process whereby cities are absolutely dependent on getting that state aid,” he said.

Hartman defended LGA, saying: “There’s a reason that in the 1970s Minnesotans believed in this, and it’s that people wanted to have lower property taxes. I think that’s one of the best sales pitches for this statewide, is that it does bring down people’s property taxes, especially here in the city of Duluth.”

How duluth stacks up

Some other cities rely on LGA even more heavily than Duluth. Carlson said some small cities derive 60 to 70 percent of their total revenue from the state.

But Carlson acknowledged that Duluth leans more heavily on LGA than most other large Minnesota cities.

Duluth received the equivalent of $318 in local government aid for every city resident as of 2010, the most recent year for which statewide data is available. That’s 83 percent more than Minnesota cities were paid on average — $173 per capita — according to data from a state auditor’s report analyzed by the Duluth News Tribune.

In comparison to other large cities, Duluth fared well in what it received from the state, with St. Paul receiving 44 percent less LGA per capita than Duluth, Minneapolis 47 percent less, Mankato 50 percent less and St. Cloud 52 percent less and Rochester 85 percent less.

Carlson explained that the LGA formula sends less aid to cities with high-value property bases and more to property-poor communities.

The funding formula takes into consideration the age of the local housing inventory, particularly the portion of homes that predate the 1940s.

Haves and have-nots

Not all cities qualify for LGA. Of Minnesota’s 853 cities, 124 receive no LGA, according to the League of Minnesota Cities. That’s an exclusion rate of nearly 15 percent.

Sen. Roger Reinert, DFL-Duluth, said he remains committed to the idea of the state continuing to play a support role, particularly for cities that serve as regional centers and those with older property bases. But he’s willing to consider alternatives to the status quo.

“Will it be LGA as we’ve known it for the past several decades? I’m not convinced of that,” he said. “That’s primarily driven by the fact that the true power base in the Legislature now is the suburbs, and most of them have never had LGA, have never had a need for it, and some of them weren’t even in existence when LGA was developed. So their mindset is: ‘We don’t get it. All we do is pay into this. We don’t get anything back from it’ — and support is weak if it’s there at all.”

Ness suggested LGA could be replaced in part if regional centers were allowed to keep a larger portion of the sales tax money they generate at home.

“The city of Duluth generates about $85 million in sales tax receipts that go to the state of Minnesota each year, and we receive $27.4 million back in the form of LGA,” he noted. Keeping some of that tax revenue in Duluth “would lessen our dependence on the state of Minnesota, and it would give us incentive to create even more economic activity within the city,” he said.

Senate Minority Leader David Hann, R-Eden Prairie, called for a rethink of the program,

saying: “There needs to be a clarification of what the purpose of LGA is, given how it’s being used today, or there needs to be an effort to restore LGA to its original function, which is to make sure that the things that are necessary for all communities are provided for where they cannot be provided out of local resources.”

Making the case for LGA

Ness remains more optimistic about the odds of saving LGA.

“Over the past six to eight years, because of cuts from the state and because of other pressures across Minnesota, we’ve seen property taxes really spike, and that’s not healthy for the state of Minnesota,” he said. “We need to regain that balance by providing property tax relief. That’s what LGA is: It’s a property tax relief program.”

Ness said the changing political climate could bode well for Duluth.

“From what I understand, both the governor and the legislative leadership understand the growing problem of property taxes in the state of Minnesota,” he said, “and my hope is that the tax reform they’re talking about is going to take the form of property tax relief, and I think that most would feel that LGA is one of the tools to accomplish that.”

Ness said a strong case can be made for restoring at least some money to cities hurt by previous cuts to LGA.

If Duluth’s LGA had been maintained at 2000 levels, adjusting only for inflation, he said the city would now be paid more than $40 million per year, versus the $27.4 million it expects to receive in 2012.

“There’s a recognition that LGA took a larger percentage cut than any other program to solve the state’s budgetary problems over the past four years, so those who have taken the biggest hits I think are well-positioned for restoration of some of those,” he said.

Harsh financial reality

With the state staring down a $1.1 billion deficit in 2013, Reinert said the likely best scenario will be to preserve local government aid at its current level. He said lawmakers will look elsewhere as they balance the budget.

“I do think that with Dems being in charge in the Legislature and with Gov. Dayton, LGA and county aid are not going to be the first things we go to, which they have been for the last eight years,” he said. “So I don’t anticipate more cuts there.”

And the chances of an increase in local government aid?

“As I’m talking to people, I’m working really hard to manage expectations,” Reinert said.

“You’re not likely to see an increase in things this year, because we still have a big fiscal problem to solve. But if we can do that in a structurally sound and responsible way, next year — the year after — we can start looking at reinvesting in core priorities for the state.”

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