Cargill may be headquartered in Minnesota now, but it got its start 150 years ago in a small Iowa town. Conover was one of many prairie communities that sprang up as the railroads ventured westward. It was sketched out in 1864 as the McGregor Western Railroad moved into the area and incorporated in 1866. The town soon swelled to as many as 1,500 people. There were “three hotels, a dozen stores, some 32 saloons – and ‘a whole street of warehouses,’” according to a Cargill history. Cargill’s founder bought a warehouse where he and a partner made money buying grain from farmers and selling it to railroads.

But the good times didn’t last. A new rail line was built, and McGregor Western moved its facilities out of Conover. Businesses started failing the same year the town incorporated. Cargill (where I work) followed the railroad out of town and went on to flourish. But by 1870, most of Conover had become cropland again. Today, there is no Conover.

Conover’s story would have ended differently had it happened in modern-day Minnesota. Our state spends millions providing life support to dying towns on the wrong side of changing economics – most visibly in the form of Local Government Aid.

“Our communities would look very, very different without LGA,” an Alexandria Echo Pres article quoted State Rep. Paul Marquart (DFL-Dilworth). “Rural Minnesota would be a wasteland.”

Maybe that’s not an entirely bad thing, though. Maybe Minnesota actually needs a few more ghost towns like Conover.

Should we help people or places?

There’s a central tension in government between acting strategically and acting fairly. Governments can rarely do both.

Strategy is about making choices. It’s about directing resources to the places where they’re most productive. In warfare, there’s the principle of concentration of force: Generals don’t divvy up their forces evenly; they weaken some areas and strengthen others in order to overwhelm the enemy at a point where they have the greatest chance for success. In cities, tax increment financing is the very definition of a strategic approach. Cities designate a specific area where they think extra resources will have a disproportionately positive effect.

Fairness, on the other hand, is what social programs aim for. Food stamps, affordable housing vouchers and the like don’t try to maximize return on investment by helping those who will put the benefits to the best use. They fairly distribute the benefits to people who face disadvantages that others don’t. Governments still aim to spend this money strategically so that it helps as many people as possible – by directing money to one program and not another, for example. But return on investment isn’t the end goal. Fairness is.

LGA explicitly aims for fairness. It uses a formula that compares a city’s “need” to its ability to pay. Cities receiving LGA also appeal to the state’s sense of fairness when they make the case for it.

“Take away the $3.5 million or so that Crookston, one of the least prosperous cities in the state when it comes to property wealth, is receiving this year in LGA, and there isn’t a property tax increase big enough to help keep the city from essentially going belly-up,” a Crookston Times editorial opined (accurately since the Coalition of Greater Minnesota Cities estimates that the city tax bill for a median home in Crookston would more than triple without LGA).

That can be a seductive argument. After all, what could be nobler than for a wealthier city to help a poorer one? We do that with people right?

But cities aren’t beings in their own right; they’re just institutions created to serve people. Spending money on struggling cities gives us less money to help struggling people. Is our goal to help people or places?

Data shows LGA props up declining cities

Let’s start by looking at the role that LGA plays in city budgets. Using data from the League of Minnesota Cities, I compared the amount of each city’s 2015 LGA allotment to its property tax levy (city only). The purpose is to determine how much the state is contributing compared to local taxpayers. A ratio of 0.5 means the LGA contribution is 50 percent of the city’s levy, while a ratio of 2.0 means it’s twice the city’s levy.¹

As you can see, there are a lot of cities that don’t receive any LGA. But the median LGA share is 0.59 – meaning half of all cities have an LGA total worth at least 59 percent of their property tax levy. That’s a lot!

Meanwhile, the cities with the highest LGA shares aren’t spread randomly across the state; they’re concentrated in Greater Minnesota.

There is every indication economies are moving away from many Greater Minnesota communities as surely as the railroad did from Conover. Huge swathes of the state still have fewer jobs than they did before the Great Recession, according to a University of Minnesota Extension report.

As a result, LGA money winds up going disproportionately to communities on the decline. Of the 490 cities with LGA totals worth at least 50 percent of their levy, 242 had 10-year population declines even as Minnesota overall grew 7.3 percent. All but 18 of the remaining 248 had fewer than 5,000 people. It’s not just that we’re failing to support growth; we’re not even staving off decay.

So what’s the problem?

LGA’s biggest supporters argue that state aid is an investment that pays dividends when industries in recipient communities create jobs and pay taxes. There are a couple problems with this line of thinking.

First, it ignores the likelihood that businesses will just move to more financially sustainable communities. Perhaps eliminating LGA in Maple Lake (LGA/levy: 0.54) would simply encourage businesses to move eight miles down Highway 55 to Buffalo (LGA/levy: 0.12), where taxes would be much lower. That, in turn, would boost Buffalo’s tax base and make it even more financially resilient.

Second, LGA critics ignore the tendency toward “subsidy cascades” – a phenomena in which subsidies beget more subsidies. For example, artificially low tax bills may encourage people to live in communities they wouldn’t otherwise choose. That increases the funding needs for an already struggling community and the state. They then try to grow their tax base through economic development incentives, drawing businesses away from parts of the state where there would have been economic growth without incentives.

We’ve seen this with Thief River Falls. The city has an LGA/levy of 1.89 – meaning it received nearly twice as much LGA as its residents paid out in taxes. Local government approved $2.2 million in tax abatement for an Arctic Cat expansion in May, and Minnesota’s Department of Employment and Economic Development awarded Arctic Cat $1.8 million. Yet even as the state is subsidizing job growth in a city that can’t sustain itself, city officials have been seeking the state’s help with a housing shortage. They initially asked for the creation of a new type of TIF district for market-rate housing. Legislators wound up creating a program that provides grants that encourage developers to build market-rate rental housing. Thief River Falls housing projects have also received TIF and Minnesota Housing Finance Agency money.

To recap:

The state subsidized Thief River Falls’ budget, which encouraged more people to live in the city than otherwise would have and, thus, created more demand for city services; In order to provide the tax base to support that additional demand, both the city and state subsidized business investments in a community that a) lacked sufficient housing for the new workers and b) lacked a construction industry that could build housing units at market prices; So the state and city then subsidized the construction of new housing for these new workers.

Is this really a healthy way to help Minnesotans?

Politically rational, economically insane

Redistributing resources to help struggling communities isn’t necessarily a bad idea in its own right. There may be limited cases where redistribution makes the whole greater than the sum of its parts. Perhaps it could create stronger regions by allowing communities to specialize. As one example, it might be worth helping bedroom communities if industry finds some competitive advantage to concentrate in a single city and squeeze out the housing market there.

LGA may also be worthwhile for communities that could prosper if only state law allowed them to use a different type of tax. The outdoor-recreation industry, for example, may not create huge amount of property values, but it may create a large amount of sales tax revenues. Perhaps LGA is necessary for some cities as long as state law forces them to rely almost exclusively on property taxes.

But by and large, this is not what is happening in Minnesota. We have a formula that determines how much cities get regardless of the wisdom of that allocation. This is politically rational but economically insane.

Alternatives

Here’s what should happen instead:

Target LGA at regional centers as much as possible: Many of the state’s regions have cities that are larger and financially stronger than surrounding communities. They also tend to have better LGA/levy ratios than surrounding communities. These places benefit the most from state support. Below you can see Mankato and Owatonna in yellow surrounded by a sea of red. Maintaining LGA levels in Mankato and Owatonna and reducing LGA to the surrounding, financially weak communities would better reflect the true cost of providing services and encourage people and businesses to settle in places they can afford, likely increasing concentration in the two regional centers.

Cut LGA for the smallest cities: There are 339 communities with fewer than 500 people that receive LGA, including 84 with 100 or fewer people. These cities do not have sufficient economic benefit to justify state subsidies. Cutting LGA for these cities would put many of them at high risk for disincorporation, but it’s important that we keep some perspective on this. Thousands of people already live in unincorporated areas, and there are numerous stores and businesses in unincorporated areas. Many people don’t need or want the services that cities provide. For these people, life will go on as normal. Those who want more services should move to a place that better matches their ability to pay for those services.

Cap LGA at 50 percent of the levy: I don’t buy the argument that communities are living large on LGA money, but high LGA ratios are a sign that a community is fundamentally insolvent. When a city can survive only with a massive injection of state aid, that’s a price signal saying people have a greater chance of thriving somewhere else. Instead of fighting to keep people in failing communities, the state should focus its efforts on helping families where they have the most opportunity. Once again, perspective is in order. Even with a 50 percent cap, the state would be paying $1 for every $2 residents pay in property taxes. That’s a heck of a deal. Capping LGA also incentivizes communities to put the most skin in the game because a bigger levy on their part means more state money.

Allow more variation in local taxes: Cities aren’t all the same. Some industries generate more property taxes; others generate more sales taxes. Residents should be able to pick the tax system that works best for their local economy. While we’re at it, let’s also give cities more freedom to try out multijurisdictional tax districts. For example, a county and several cities may want to set-up an area-wide sales tax district so businesses can’t move just outside city limits to skirt a tax. There are lots of options out there if we just loosen the restrictions. Thriving communities require less from the state, so it’s in the state’s best interest to give them the best shot at success.

Don’t use LGA cuts to balance the budget: Cutting LGA to balance the budget lacks strategy every bit as much as pouring more money into LGA. Money saved from LGA reductions shouldn’t be mindlessly put back on the state’s books. Legislators should instead judge other programs and services on their own merits. If the benefits of a program don’t exceed their cost, it doesn’t matter how much money they have to work with — it’s still not a worthwhile expenditure.

Of course, cities would fight these proposals every step of the way. The Crookston Times editorial referenced earlier argued that elimination of LGA “would lead to a day of reckoning like you wouldn’t believe, which would be felt in Crookston and hundreds of other cities.”

“Reckoning,” though, is just a synonym for a settling of accounts. Perhaps it’s time we had a few more ghost towns on Minnesota’s books.

Footnote:

¹Admittedly, there are a couple caveats that come with this method of analysis:

Communities differ in their willingness to tax themselves and the services they consider essential. This is a frequent bone of contention in any state aid debate. This only compares LGA to the amount levied, not the overall city budget. Unfortunately, I’m not aware of any statewide budget dataset. I think this is still a good proxy for examining LGA – not least because one of the program’s purposes (and arguably the most visible one) is to keep property taxes low. Just keep in mind that the comparison is a ratio of LGA to city property taxes, not LGA’s share of the overall city budget.

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