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Small cities worry over state aid's future

ST. PAUL -- Cities would receive more state money next year if legislators approve Governor Mark Dayton's budget, but after that some could get smaller checks from the Capitol.

Dayton proposes adding $80 million next year to the Local Government Aid (LGA) program that primarily helps Greater Minnesota and urban cities, a 19 percent increase. In two years, he proposes that a new formula be used to determine how much cities get, a formula that some fear would reduce their payments.

The 13 cities in the Douglas County area that receive LGA would fare much better under the governor's plan compared to the current formula, with the exception of Osakis.

Osakis expects to receive $380,867 in LGA this year and was bracing for a drop down to $363,447 in 2014. Dayton's proposal increases the aid to $433,127 next year but lowers it to $395,604 in 2018, 9 percent less than the $437,360 the city would receive under current law.

All other cities in the Douglas County area would get more aid under Dayton's proposal in 2014 and in 2018 as opposed to the current formula.

"The concern we have," Taddei said, "is a shift of LGA from Greater Minnesota to the metro area."

Taddei said that in 2014, 69 percent of LGA is expected to go to greater Minnesota but by 2018, that percentage may drop to 62 percent. "Whether or not that will happen, we don't know," he added.

Taddei added that smaller cities provide more services, such as recreation, airports and libraries, than their metro counterparts.

LGA was established to help cities lacking ability to collect sufficient property taxes to fund basic needs. The formula used to distribute the money has changed over the years, and Dayton suggests that it be simplified, which would result in more money for some cities and less for others.

The Democratic governor's plan would spread out the money more than now, especially increasing aid to older suburbs.

"The only problem we see is that the test [of need] has nothing to do with libraries or parks, things that are very important to a lot of cities," Hawley Vice Mayor John Young Jr. said.

Duluth Mayor Don Ness said his community would be like other cities, receiving a bit more aid next year, but it would lose $300,000 after that. Even so, he said that a balanced and predictable state budget is more important than a small change in state aid, and he thinks the Dayton budget plan would do better.

"We need to get off this roller coaster," Ness said about the state budget, which has dealt cities varying amounts of aid in the past several years. "We need something we can count on."

The Coalition of Greater Minnesota Cities, an organization representing more than 80 cities, including Alexandria and Glenwood, is studying the new distribution formula. In a few weeks, it likely will present a counterproposal to the Dayton plan.

"We don't think this is going to be sorted out for a month," said Tim Flaherty of the coalition.

Dayton suggests that increased LGA payments mean cities will not raise property taxes as much as they otherwise would. Republicans are not so sure.

"How can you guarantee that people's property taxes will decrease?" Senator Carla Nelson, R-Rochester, asked, noting that property tax levels are local decisions.

Revenue Commissioner Myron Frans admitted that "local officials will make those decisions," and he could offer no guarantee.

"We really have no idea" if LGA changes would affect property taxes, Senator Dave Thompson, R-Lakeville, said, adding that local officials "are screwing it up" by raising taxes.

Frans said local officials have done a good job during the past decade of fiscal problems. "We don't think at all they have messed it up, on the contrary ... they have the best interests of their constituents at heart."

The LGA distribution formula has grown to a complex math task in the decades since the program began. Factors to determine aid have ranged from the number of accidents to average household size.

Dayton suggests cutting it from the current seven-factor formula to three: population, the amount of tax-exempt property and the number of homes built before 1970.

Under the Dayton plan, each of the 729 cities that receive LGA this year would receive $30 per resident more in 2014.

Beginning in 2015, each city's LGA change would be limited to $10 per person, with no reduction allowed to be more than $300,000 a year.

Cities receive $428 million this year and under the Dayton proposal would rise to $506 next year, where it would remain.

Eric Willette of the Minnesota Revenue Department reported that by 2018, 686 cities would get more aid, with 67 getting less -- mostly higher-wealth suburbs. Also receiving less money would be many cities from 1,500 to 3,000 population.