Some Minnesota cities don't like their 'LGA surprise'

This year's legislative session brought good news and bad news for cities. Lawmakers approved a $42 million increase in local government aid.

But in 11th-hour budget negotiations, Gov. Tim Pawlenty succeeded in getting something he'd long pushed for -- a cap on the amount cities can raise property taxes.

Initially, Bemidji City Manager John Chattin thought the new tax law was not great, but OK for Bemidji. Now, he's convinced it's a bad deal.

"The reality is, I think we were duped," said Chattin.

Bemidji was expecting a state aid increase of around $212,000. But Chattin says when the city plugged the numbers into a complex new property tax cap formula, the aid money essentially evaporated.

"They're touting the fact that we got more local government aid. The reality is, we don't get any additional. ... And with the levy limits, we're going to be severely restricted in '09."

"They're touting the fact that we got more local government aid," said Chattin. "The reality is, we don't get any additional local government aid. And with the levy limits, we are going to be severely restricted in '09 for revenues. As a matter of fact, we'll be lucky to get even marginally more than what we're getting now."

Local government aid has been a sore spot for cities since 2003, when the Legislature slashed the aid program to fix a $4 billion deficit. It forced some cities to raise property taxes, and many to lay off workers, trim services and delay infrastructure maintenance.

International Falls City Manager Ron Otterness was expecting more than $500,000 in additionl local government aid for 2009. But when he ran the tax cap formula under the new law, Otterness discovered the end result was actually a slight decrease in aid.

Otterness says International Falls already runs a tight ship and an aid increase is badly needed. He says some of the city's streets and sidewalks are in rough shape and need fixing, but the city can't afford it.

"We had been expecting increased aid," Otterness said. "We had been deferring projects and spending some of our reserves in anticipation of increased aid. But now we're unable to take care of those deferred matters, because levy limits came along with it."

Officials with the Minnesota Department of Revenue say the new law was designed to reduce property taxes, and cities shouldn't have been surprised by the outcome.

"It's hard to believe how anyone could be unaware of the law's intent or impact," said Revenue Department's Kit Borgman.

"The cities are in fact getting a $42 million increase," Borgman said. "However, if the recipient city is bumped up against the levy limit, a portion of the new LGA dollars must be used to reduce property tax burdens rather than be utilized for increasing spending."

Minnesota city officials have staunchly opposed property tax caps imposed by the state. They've argued that city leaders are generally frugal and know best what their communities need.

State Rep. Morrie Lanning, R-Moorhead, serves on the House tax committee. Lanning says he opposed the governor's push for a cap, especially because of its negative impact on rural communities.

"There is a shift here, and less of the new aid that's being provided is going to go to greater Minnesota, and more will go to the metropolitan area," Lanning said. "And that, too, is something I would rather not have seen happen. But it had to happen in order to get the compromise reached and the tax bill finally approved."

Most LGA dollars still flow to non-metro cities, according to the Department of Revenue. For aid paid in 2009, $342 million will go to cities in greater Minnesota and $184 million will flow to the metro area, with most of that going to Minneapolis and St. Paul.

City leaders worry their budget problems are only going to get worse. This year, lawmakers solved a nearly $1 billion budget deficit by taking $500 million from the state budget reserve. That leaves little left to deal with future downturns, and some see that as a threat to future government aid.

Gary Carlson, a lobbyist for the League of Minnesota Cities, says projections show that when inflation is factored in, the state could face a $2 billion deficit in the next biennium, which begins next summer.

"I certainly don't want to be an alarmist here, but a $2 billion state budget deficit with hardly any money in reserve is kind of a daunting financial problem," Carlson said. "Given the rising energy prices, given rising unemployment figures, the impact of energy prices throughout the economy, it's not inconceivable that the deficit for the state of Minnesota could get worse before it gets better."

City officials in Minnesota worry the property tax cap has their hands tied for dealing with a shaky economic future. They also worry the state's own pending budget crunch will mean more aid to cities will be taken away.

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