Minnesota Cities Magazine

2016 Legislative Session: Taking Care of Unfinished Business

A photo looking up at the MN Capitol dome under construction with the text,The 2016 legislative session promises to be unique. With the Capitol building largely closed for construction, and the Legislature not set to convene until March 8, the session will be short and intense, with much of the focus on finishing the unfinished business of 2015.

But first, how did we get into this situation? Let’s take a look back.

After the 2014 elections switched control of the House of Representatives from Democrats to Republicans, and returned Minnesota to divided government, many people anticipated that the number of bills signed into law would drop considerably. Those predictions were accurate.

By the end of the special session last June, Gov. Dayton had signed 83 bills into law, the lowest number in decades. Perhaps more surprising was that the Legislature failed to pass an omnibus tax bill, opting instead to keep nearly $1 billion of unspent revenue going into the 2016 session. And despite statements from legislative leaders and Gov. Dayton that transportation funding would be a top priority, they only reached agreement for a “lights-on” transportation funding package.

So that’s why in 2016, the Legislature will continue to work on many issues it started in 2015. In addition to transportation funding and taxes, major continuing issues of interest to cities also include broadband funding and elections administration.

Transportation funding
There is near universal agreement that Minnesota’s transportation infrastructure is in need of a significant ongoing increase in funding. The last truly comprehensive transportation funding package was passed in 2008, over then-Gov. Pawlenty’s veto. That bill increased the state gas tax by 5 cents per gallon.

The gas tax does not increase with inflation, so its purchasing power has declined over time. In addition to the gas tax, the primary sources of state transportation funding are the Motor Vehicle Sales Tax and the Motor Vehicle Registration Tax, also known as “tab fees.” The tax revenue from the three major sources are deposited into the Highway User Tax Distribution Fund (HUTD), and of the total revenue in the HUTD, only 9 percent is dedicated to the Municipal State Aid Street Fund (MSA).

Funding needs for city streets
Currently, MSA is limited to cities with populations over 5,000—147 of the 853 cities in Minnesota—and cannot be applied to more than 20 percent of a city’s lane miles. This places the burden of city street maintenance and repair largely on local property taxes.

For years, the League of Minnesota Cities has pushed the Legislature to allow all cities to create street improvement districts in order to adequately fund city streets, but the bills met stiff resistance and were not passed into law. In 2015 the League aggressively pushed for increased funding for city streets.

Despite agreement on the need, there was not agreement on how that need should be met. House Republicans strongly opposed any increase to the gas tax, and passed a bill that raised revenue by dedicating existing general fund dollars collected through the sales tax on auto parts and vehicle rentals.

Top half of statue of Governor Johnson, located in front of the MN State Capitol.In the Senate bill, the primary revenue generator was a 6.5 percent tax on wholesale fuels, which would be paid at the refinery instead of at the pump. The Senate also increased the MSA portion of the HUTD formula by 2.15 percent. In addition, the Senate proposed a $10 surcharge on license tab fees to be dedicated to city streets, which would have generated $57 million in desperately needed funds.

Because the proposals from both the House and Senate were being considered by a conference committee that did not complete its work, the bills are still alive and may be considered again in 2016.

Small Cities Assistance Account
The news was not all bad for cities. The lights-on bill did create the Small Cities Assistance Account, aimed at helping the 706 cities under 5,000 in population, which do not receive funding from the MSA system. The Legislature appropriated $12.5 million to the account, which will be divided among the 706 cities according to a formula based on population, street miles, and state aid received.

The grants range from approximately $5,000 to $62,000. This will obviously not have a significant impact on city transportation funding needs, but it is an important recognition of the need faced by smaller cities, and the League will work hard to get additional funds in the future.

When the Legislature passed the transportation bill, it did not adopt a conference committee report, which has the effect of adjourning the conference committee. Instead, it took the unusual step of leaving the transportation conference committee in place, which would allow the conference committee to pick up where it left off in 2015.

Taxes
For the first time in as long as anyone can remember, the Legislature did not pass an omnibus tax bill during a budget year. This was despite the fact that a $1.8 billion surplus set the stage for politically popular tax cuts.

During most years, legislative leaders reach a global agreement on the size of the state budget, including any tax increases or cuts. Then committee chairs and their respective conference committees hammer out the details. When legislative leaders were unable to reach a global compromise, they decided to remove tax cuts from the table entirely, leaving unspent money for the 2016 session, not coincidentally an election year for both the House and Senate. In the absence of tax cuts, there was no appetite for any tax bill, leaving dozens of issues unresolved.

The unresolved tax issues of importance to cities included the following:

  • Local government aid (LGA). Although LGA is still paid to cities regardless of whether there is a tax bill, the total certified LGA payment did not increase. Legislation that would have included an ongoing inflation adjustment to future LGA payments also was not adopted. The League supports an inflation adjustment and an increase in the LGA appropriation to at least the level that would have been provided prior to the significant cuts made in 2003.
  • Sales tax exemption on construction materials.A tall vertical shot of the MN Capitol dome under construction When the Legislature restored the city and county sales tax exemption in 2013, many cities discovered that it was very difficult and often not cost-effective to claim the exemption on construction materials. This is due to complicated rules adopted by the Department of Revenue many years earlier. The process is so cumbersome that the Department of Revenue estimates the cost of a League proposal to streamline the process at $20 million a year. That means that cities and other exempt entities are paying $20 million in sales tax on materials that are exempt. League-sponsored legislation that would convert the existing process to a simpler refund was not enacted.
  • Workforce housing tax increment financing (TIF). Workforce housing has been a legislative priority for the League for the past two sessions, and the League was successful in getting a $4 million grant program signed into law. Another League proposal that would have created a workforce housing TIF district was included in both the Senate and House tax bills, but was one of the dozens of provisions lost when negotiations over the omnibus tax bill collapsed.
  • Sales tax exemption for joint powers entities. In perhaps the most disappointing development of the session, the E-12 education conference committee inserted a provision into its funding bill that delayed the effective date of the sales tax exemption for joint powers entities and special districts from Jan. 1, 2016, to Jan. 1, 2017. If left unchanged, this provision will cost local units of government $20 million in 2016.

Broadband funding
Expanding broadband to all Minnesota communities has been a well-established policy and priority of the League. In 2015, the Legislature allocated $10.59 million to the Border-to-Border Broadband Infrastructure Grant Program (half the grant dollars awarded in 2014), and funded operations for the Office of Broadband Development in the Department of Employment and Economic Development.

The state provides matching grants to increase local investment by private providers and local units of government. Grants are awarded in areas that have a lower density of households because it is difficult for providers to recoup build-out costs in those areas. It is estimated that it will cost between $900 million and $3.2 billion to close the gap of household broadband access in Minnesota.

A multi-faceted approach is necessary to close the access gap. The League supports clarifying state law to allow local and state bonding for broadband infrastructure, and providing incentives for public-private partnerships where feasible. The League will continue to strongly advocate for continued investment in the broadband office and grant program.

Text box that says, Elections administration
Increasing efficiency and improving voter experience in elections is a long-standing legislative goal of the League. In recent years, more and more voters are choosing to vote early by voting absentee either by mail or in person.

Currently, the process requires an in-person early voter to place his or her ballot into a series of envelopes, which are processed and opened after the voter has left the building. This increases the possibility of the voter not having the opportunity to correct the ballot if he or she made a mistake.

Last session, the Senate heard proposals allowing voters to place their ballots into a secure tabulator to be counted when the polls close on Election Day (generally known as “early voting”). If a voter has made a mistake, the tabulator would detect the mistake and allow the voter to fix any errors. This would ensure that the ballot is counted as the voter intended. Unfortunately, though, the bill received no hearings in the House.

Because of the 2016 presidential election and expected high voter turnout, election officials continue to express significant concern about the current process, and advocate for the implementation of a true early voting system to improve the process for voters and election administrators. (Read more about elections in Let's Talk.)

Déjà vu for 2016
With so much unfinished business carried over into the 2016 session, we’ll all have a strong sense of déjà vu. But the League will be there all the same, working hard to make sure these— and other issues of importance to cities—are addressed and result in city-friendly outcomes.

This article was written by the League’s Intergovernmental Relations staff. Contact information is available at www.lmc.org/igr-staff.

Read the January-February 2016 issue of Minnesota Cities Magazine

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