From Grand Marais to Pipestone, many Minnesota cities see a regular state aid payment as an important equalizer they consider critical to their survival.

An $80 million annual boost to that aid last year meant even more cash for road repairs, emergency services and a reduced property tax burden. In 2025 allocations announced in late July, nearly 90% of the state’s 855 cities will receive local government aid (LGA) from a $644 million largesse. It clearly matters.

“Not to be dramatic, but it’s basically our lifeblood,” said Ely Mayor Heidi Omerza.

But a complex formula spits out LGA winners and losers, and the results can be head-scratching.

Of the roughly 10% of cities that receive no LGA money, many are in the Twin Cities suburbs. But several small towns boasting miles of shoreline with expensive lake homes also don’t make the cut.

“We have no money to make a change or create anything for our future,” said Mandi Payment, deputy clerk in Federal Dam, a city of 120 people north of Leech Lake. “We barely scrape by.”

Considered innovative when it was enacted in 1971, the needs-based state aid program arrived with Gov. Wendell Anderson’s “Minnesota Miracle,” which was designed to mitigate rising property taxes and massive disparities in education funding. LGA replaced a sales tax revenue sharing program.

It’s been refined through the decades, with an update in 2023. A notable change for larger cities considers their level of commercial property and the number of residents over age 65.

The state uses a formula that measures need and a city’s ability to raise its own revenue via property taxes. How it’s measured depends on the city’s population — small, medium or large.

Minneapolis, St. Paul and Duluth get the most state aid. For some smaller cities, it’s a third or more of their annual budgets and is considered necessary to sustain that “small town life,” said Fairmont City Council Member Jay Maynard.

“If they can’t get [that life] in Minnesota, they will go someplace where they can,” Maynard said.

Cities with fewer than 2,500 residents get LGA based on a population formula. For cities that fall between 2,500 and 10,000 residents, the aid is based on population decline, age of the housing stock and the percentage of commercial, industrial or utility property tax base. For larger cities, it’s the same, but the formula also accounts for the percentage of residents 65 and older.

The aid is largely driven by a city’s property tax base, so cities with high tax bases compared with their needs will get little or nothing, said Bradley Peterson, a lobbyist for the Coalition of Greater Minnesota Cities.

State leaders in the 1970s wanted residents to have a high quality of life across Minnesota, regardless of their tax base, he said.

Without city wealth, property owners pay high rates for essential city services. That’s why LGA takes on such a critical role in greater Minnesota where fewer people live and resources are scarce, said Rep. Dave Lislegard, DFL-Aurora.

Just to survive, he said, “You’re seeing more and more communities pair and share to minimize costs.”

Homeowners pay boatloads in property taxes to live on the shores of Minnesota lakes, which is partly why communities such as Nisswa, Crosslake and Breezy Point get zero LGA dollars. But it’s not always straightforward.

Walker is getting $43,000 in LGA, but neighboring Hackensack is getting none. Ottertail gets no LGA, but Henning and New York Mills down the road are getting state aid.

“When there’s other cities that are able to benefit from LGA, why not us?” asked Amanda Thorson, clerk and treasurer in Ottertail.

Thorson said Ottertail has to repair and resurface streets just like its neighbors. But the city’s tax base and a higher median income with lakeshore property disqualify it from LGA and certain grants.

“Just because we have some beautiful homes doesn’t mean that we should be negated for that ability to have some assistance,” said Karrie Roeschlein, city treasurer and clerk in Wahkon on the south shore of Mille Lacs Lake.

There, dozens of homes along Lake Shore Boulevard boost the tax base, putting LGA out of reach. The city secured a grant through the U.S. Army Corps of Engineers to replace a sewer main, but Wahkon had to take out a small interest loan to see the project through. That burden will fall on taxpayers for more than 20 years.

Harbor Isle in Federal Dam has some gorgeous lake homes, too, but it’s not a reflection of the entire city.

“I wish people would come and look around and just see the poverty that people are living in,” said Payment, the deputy clerk. “Maybe they don’t have a formula for it. Maybe just be human about it.”

Like many cities that don’t qualify for LGA, Federal Dam looks to grants, like those through the state’s Small Cities Assistance Aid program, which funds transportation needs. Payment said the city received $12,000 this year.

“That’ll get us some gravel,” she said.

Virginia and Eveleth are handed eye-popping amounts per capita at more than $800 and $900, respectively. Northeast Minnesota’s Proctor is only slightly smaller than those two cities but gets less than half as much per person.

Vastly different amounts allotted to similarly sized cities can mostly be explained by their ability to pay, said Nathan Jesson, who works on tax and public finance issues for the League of Minnesota Cities.

Even cities with high needs won’t get LGA if they can pay for them with property tax revenue, he said.

About a third of Virginia’s budget consists of LGA, which it uses to help fund its full-time fire department and ambulance service. The boom and bust of mining has drained Virginia’s population, while aging infrastructure, a shortage of single-family homes and a large percentage of renters contribute to its need, Mayor Larry Cuffe Jr. said.

Virginia, like many other jurisdictions in northern Minnesota, also gets revenue from taconite production taxes, which mining companies pay instead of property taxes. The amount is far less than its typical LGA allocation.

“Without [LGA], we would be just a shell of our former self,” Cuffe said.

Rochester, Minnesota’s third-largest city with a population of 123,000, gets only about $5 million in LGA. That compares with $82 million each for Minneapolis and St. Paul. Duluth, which has about 35,000 fewer residents, gets $35 million.

Why so little for Rochester? Blame its booming growth and newer housing.

“It’s really hard to create a formula that works for the entire state, so I don’t envy the exercise that legislators have to go through every 10 years,” said Heather Corcoran, the city’s legislative liaison at the State Capitol. “But even then, that’s one thing where we don’t hit the mark.”

She argues that cities in the Twin Cities metro area can often offset funding gaps through partnerships with other entities such as the Metropolitan Council. Rochester has to fund its own transportation, parks and even public safety services that benefit nearby communities.

“We kind of feel like we’re on an island sometimes and expected to punch above our weight,” Corcoran said.

When St. Cloud Mayor Dave Kleis presented his first budget to the City Council in 2005, local government aid made up more than 40% of the city’s revenue. This year, it makes up 18% — not nearly enough to cover the costs for which it’s intended, Kleis said.

“Every time I do a budget, it seems to decrease more,” he said of the percentage of city revenue that comes from LGA. “It hasn’t really kept up with inflation.”

St. Cloud is a regional center, and LGA has historically helped offset its heavy daytime populations. When LGA declines, the costs of the police force handling that daytime bump are borne by property taxpayers.

A decade ago, Kleis and Minneapolis Mayor R.T. Rybak co-chaired a committee to look at LGA reform and recommended that the state simplify the formula and make it more geographically balanced. But Kleis isn’t sure any of the changes in recent years do much for overburdened taxpayers, at least in regional centers.

Peterson, of the Coalition of Greater Minnesota, said inflation continues to put pressure on cities. He expects it to be a key discussion in the next legislative session.

LGA has been clawed back only a handful of times, most notably by Gov. Tim Pawlenty more than a dozen years ago. With that lesson learned, many city leaders have contingency plans.

Waite Park Mayor Rick Miller said he hopes to earmark the city’s $500,000 in LGA for road improvements but has warned the City Council not to budget the aid just yet. He recalled when the second of two installments was withdrawn after the city had already spent it.

“We don’t want to spend it until we know for sure we’ve got it in the bank,” Miller said.

Ely Mayor Omerza also recalled the last time cities lost LGA at the end of the year. She said it forced the city at the edge of the Boundary Waters Canoe Area Wilderness to borrow money to pay its bills.

“So it’s something that we are always grateful for,” she said.

Star Tribune staff writers Jenny Berg, Trey Mewes and Jp Lawrence and data team intern Victoria Stavish contributed to this story.