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Levy Limits and LGA funding

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BACKGROUND

In 2008, the State of Minnesota approved levy limits for municipal governments accompanied by a boost in Local Government Aid (LGA) funding. The limits are in place for cities with populations greater than 2,500 people from 2009-2011. Cities with populations under 2,500 are exempt from the levy limits.

The levy limit law calls for cities to limit their annual increase in revenue from their combined general tax levy and LGA appropriation to the lesser of 3.9% or the change in the implicit price deflator (IPD) for state and local governments. There are, however, mechanisms for revenue growth in excess of 3.9%, with allowable adjustments to account for household growth and taxable market value growth from construction of new commercial and industrial property within a city. These adjustments allow for additional revenue growth of one-half of the percentage increase in households and taxable market value from the construction of new commercial and industrial property.

Special levies, such as those that were voter approved, used to pay for natural disaster recovery and levies for debt, often represent costs over which municipalities have limited ability to control and are exempt from the levy limit law.

For Minneapolis, the 2010 base levy subject to the levy limit is $184.4 million. The total levy amount, including the $82.7 million in levies not subject to the limits, is $267.1 million. LGA for 2010 is estimated at $68.7 million using the current formula.

CHANGING CIRCUMSTANCES

At the end of 2008, the Governor used the power of "unallotment" to remove over $13.2 million of the LGA distribution to the City of Minneapolis out of a total reduction of $66 million from cities – approximately 20% of the total cut to cities. This money was already certified, and spent. Because the unallotment came at the end of the City’s fiscal year, the City had to use reserves to pay these costs because there was no time to cut spending prior to the end of the fiscal year (December 31).

Because the State did not structurally balance its budget (ongoing spending exceeds ongoing revenues), the State has found itself in a precarious situation. Since the last State fiscal crisis, the City has put great efforts into long-term financial planning and has built up a 15% contingency balance within its general fund to best position itself to handle financial uncertainties. It is the City’s position, however, that it should not be punished for the State’s fiscal mismanagement.

In 2009, the State unallotted local governments again, including a $192.5 million cut to cities in the FY 2009-2010 budget. Minneapolis’s $29.9 million cut comes to 15.5% of the total – more than double the City’s share of the State’s population. The 2009 cut was $8.5 million from the certified amount, and the 2010 cut is $21.3 million, or 23.7%.

While the State was reducing distributions to cities, the levy limit law simultaneously hampered cities’ abilities to raise revenue, forcing Minneapolis and other cities to make drastic cuts. Levy limits make responsible long-term planning much more difficult for cities. Any further cuts in LGA should be accompanied by a removal of the levy limits.

MINNEAPOLIS HAS BEEN IMPACTED

Minneapolis has been making significant reductions to its General Fund budget since 2003, at which time State Aid comprised 40% of its General Fund revenue while property taxes provided 29% of the revenue. In 2010, State Aid comprises just 19% of General Fund revenue while property taxes provide 46%.

The largest activities in the City’s General Fund are Police and Fire, which make up 54.4% of the $372 million total in 2010. State reductions to LGA accompanied by levy limits cannot be taken without significant impacts to public safety.

Existing pensions pressures over which the City has no control will increase by $8.4 million in 2010, a 118% increase over 2009 – these increases are related to investment losses associated with the City’s closed pension plans. LGA cuts must be managed on top of these (and other) financial pressures.

MINNEAPOLIS HAS BEEN PROACTIVE

In July of 2002, the City adopted a five-year financial planning resolution, prior to the LGA cuts in 2003, to ensure a long-term approach to funding City services. As part of this action, salary growth was limited to 2% annually for five years and $60M in cuts to services were planned for 2004-2010, with priority funding for public safety services. Through strong financial management, including the elimination of over $85 million in debt, the City was able to scale back those cuts and return police staffing to the level it was at prior to the elimination of federal COPS funding.

MORE INFORMATION

City of Minneapolis Finance Department
Room 325M, City Hall
350 S. 5th Street
Minneapolis, MN 55415
(612) 673-2918

March 2010

Last updated Nov 16, 2011