How cities raise money in modern-era Minnesota

Here's some good news: The recession is finally over for this state's city governments.

I'm not talking about the Great Recession of 2008-09. I refer to the smaller recession of 2001-02 — the one that led in 2003 to a $150 million-per-year whack in state payments to cities via local government aid (LGA).

The 2019 Legislature and Gov. Tim Walz agreed that, beginning next year, LGA levels will finally return to the golden days — of 2002.

Inflation-conscious readers will question whether that's an achievement worthy of ballyhoo. If LGA had been spared in 2003 and allowed to climb apace with the consumer price index since then, it would send $235 million more per year today to city governments throughout the state. Tax-conscious readers will grouse that the property tax increases that cities enacted to cope with 17 years of LGA parsimony are likely here to stay.

Nevertheless, I'm waving a sparkler this July 4th weekend in honor of state government's renewed commitment to LGA. Along with its Minnesota Miracle policy cousins that send state income and sales tax dollars to school districts and counties, LGA has been a force for good in this state. When Minnesotans congratulate themselves on a superior quality of life compared with whatever other state they're inclined to scorn, they should know that the state-local partnership embodied by LGA helped produce Minnesota's advantage.

They should also know that despite this year's gains, the state-local partnership that was created in the late 1960s and early 1970s is due for a half-century tuneup.

LGA and the state's school and county aid programs are Minnesota's version of a mid-20th-century idea the feds called revenue-sharing. Those programs use state government's robust revenue-raising engines — income and sales taxes — to collect money that's then shared and spent locally, with a fair amount of local discretion. They were built on the bipartisan notion that Minnesotans should have comparable access to essential services — public safety, infrastructure, schools and the rest — regardless of the property wealth of the community in which they live.

How much money should flow to which locals, and with what strings attached, have always been matters for debate. But the stresses of the last two decades have called into question something more fundamental to the Minnesota Miracle concept: Should cities have more authority to raise taxes — specifically, sales taxes — on their own?

Legislators have jealously guarded their prerogative to set sales tax rates. What in State Capitol parlance are called "local option sales taxes" in reality are not options that city governments are free to exercise. They require "captain-may-we" permission from the Legislature, along with the approval of a majority of voters in a municipal referendum.

To illustrate: In 2018, legislators spurned Duluth's request for a 0.5 sales tax boost for street improvements, even though it had already received a roaring 76.5% approval in a citywide referendum.

This year, legislators reversed themselves and said a belated yes to Duluth. Then they directed that no longer can cities take a sales tax request to the voters before first asking the Legislature for its blessing, and tightened the criteria for "regionally significant" projects eligible for the option.

In some respects, that's a return to the policy that prevailed during the first 40 years of the Minnesota Miracle era. That may be why no howl of protest arose from the official quarters of the League of Minnesota Cities. It was focused on the LGA that flows to more than 750 Minnesota cities, not the local option sales taxes that today are collected by 35.

But when I visited the league's June 26-28 annual conference in Duluth, I detected concern among city officials about legislators tightening their grip on the sales tax — particularly now, when cities face increasing pressure to do more of the heavy lifting for all of government.

Federal dysfunction and sporadic state government gridlock in recent decades have shifted a good share of the burden of national and state problems onto municipal government. Climate change, aging infrastructure, income inequality, rapid demographic and industrial shifts, a housing shortage — all increasingly find their way to city council agendas.

That's not a bad thing, one can argue. Broadly speaking, municipal governments in Minnesota and around the country are effective operations. Their officially nonpartisan status has helped (mostly) shield them from partisan slings and arrows. So have the habits of practicality that come from providing such essentials as sewers and snowplowing.

But city officials say they could use more tools with which to meet obvious needs that the federal and state governments aren't addressing. That has them eyeing the least politically objectionable tax in government's toolbox — the sales tax.

"There's no doubt, the sales tax is a go-to source of revenue right now," confirmed Gary Carlson, the League of Minnesota Cities' intergovernmental relations director and tax policy guru. "The property tax has been maxed out in many cities."

Carlson noted that the 2013 Legislature gave county boards the authority to impose a half-cent sales tax for transportation purposes, without needing to ask legislators or voters for permission first. More than half of the state's counties have done as much. City officials — who possess election certificates every bit as valid as county commissioners or legislators — haven't been granted the same license.

The League of Minnesota Cities has been pitching a modest change: Free city officials from a duty to get legislative approval when they seek a sales tax increase for capital projects of regional significance, say a new library or arena. That proposal would preserve the requirement that cities seek voter approval via a referendum. But it would cut out the legislative pleading and the political machinations that inevitably go with it.

Carlson said that idea has had a few Capitol hearings, but hasn't caught on with legislators. He wishes they would notice that last fall, 22 cities went to their voters with proposals for a sales tax boost to pay for projects ranging from street and sewer improvements to new police stations, libraries, community centers and athletic facilities. Of the 22, 16 were approved, many with more than 60% of the vote.

"It's eye-opening to see how great the needs are in Minnesota's cities," Carlson said. "There are a lot of projects that citizens want funded."

A half-century tuneup of Minnesota's vaunted state-local partnership should start with state acknowledgment that since 2003, it hasn't lived up to its end of the bargain. Carlson noted that LGA once comprised 4.5% of the state budget; today it's about 2%. Paying LGA in 2020 at 2002 levels isn't much to brag about. LGA should grow regularly and predictably in coming years.

Further, LGA's distribution formula, last rewritten in 2013, should be renewed to account for the widening scope of city activities. It's troubling — and not politically sustainable — to have 95 of the state's 853 cities now deemed sufficiently affluent to be "off the formula."

A 21st-century state-local partnership should also give city officials easier access to sales tax revenue — not as a substitute for LGA, but in recognition of cities' changing roles and responsibilities.

Those moves would be smart adjustments to today's governing reality in America: Cities are where government still works — and that makes them more important than ever.

Lori Sturdevant is a retired Star Tribune editorial writer. She is at lsturdevant@startribune.com.