As state legislators gathered in St. Paul last week for the opening of the 2009 Legislative Session most lawmakers seemed overwhelmed by the task that lies ahead:  constructing a biennial budget for 2010-2011, which would take state spending from around $36.8 billion down to about $32 billion, due to an estimated shortfall of $4.8 billion.  These legislators also seemed to instinctively know the reality that the shortfall will likely grow by the time they receive the next budget forecast in late February.

For many legislators, the paradigm of actually reducing state spending was something that they never thought they would have to do; certainly the thought did not occur to them while campaigning last year.  Many of these folks came to public office with the intent of spending as much government money as possible and not changing the way services are delivered, let alone actually reducing services provided by the state government.  Facing the prospect of telling their constituents that the well is dry doesn’t appeal to most lawmakers.

Having spent a few years in the State House myself, I thought I could offer at least one suggestion to the current group of budgeting titans.  My budget balancing proposal is very simple and easy to understand – eliminate Local Government Aid (LGA).  Local Government Aid is a direct transfer payment to cities with no strings attached.  LGA payments for the projected 2010-2011 state budget total over $1 billion.

Cities across Minnesota receive these payments based on a formula that attempts to account for “need,” but has been the focus of endless legislative debate for almost 40 years.  The obvious question most rational citizens should ask is why eliminate LGA?

There are four key reasons why lawmakers should take this opportunity to remove the ugly old LGA wart from the state’s budget.

#1:  The State is projected to spend $3.4 billion in Local Property Tax Aids and Credits.  LGA makes up approximately one-third of the total, meaning the remaining $2.4 billion would still be in place.  Not an insignificant amount of money.  The next one-third is used for direct refunds to homeowners and renters based on a formula of property taxes paid relative to income.  The other one-third is primarily direct aid and credits for specific cities, towns or school districts.  The redistribution of over a billion dollars through the LGA “needs” formula is obsolete.  It’s similar to paying an allowance to a son or daughter who is 40 years old and living on their own. 

#2:  The LGA formula is plain unfair.  Millions of dollars are handed out to cities across Minnesota for the simple reason that “we always have.”  Almost half of Minnesota’s population lives in communities that receive NO/NONE/ZERO LGA, while many cities receive more in state aid than they levy.  This system is blatantly unfair, but legislators who represent the winners are unwilling to give up their ill-gotten gains.

#3:  The distribution of over $1 billion in LGA payments encourages local spending, rather than promoting frugality.  Numerous studies have shown there is little correlation between state aids and property tax rates.  Despite lawmakers attempt to cap property tax increases at 3.9% last session, in 2009 property tax rates will increase by over 6.5% statewide, this in the face of double digit declines in home values.  The forking over of a billion dollars in state monies to cities has shown to do little to reduce local property tax burdens.  In fact it tends to encourage more spending because the State is picking up the tab. 

#4:  There is a crying need for transparency in government spending.  With hundreds of millions of dollars being transferred into city treasuries, how do local citizens know or understand what services they are paying for and which services are being paid for with state dollars.  These massive state aid payments mask the true cost of local government spending and burden state taxpayers with local spending programs that are unaccountable to local property owners.

The current budget deficit represents a rare opportunity to make real changes.  Now is the time to wipe the slate clean and restore some fairness and accountability to the property tax system in Minnesota.  Eliminating LGA payments to cities also represents a solution for 20% of the State’s nearly $5 billion shortfall.  One billion in the bank, $4 billion to go!