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State lawmakers use a taconite production tax to distribute millions in one-time grants to Iron Range communities, a system so lax that there is no application process, the Minnesota Legislative Auditor reported Thursday.

While the auditor found no misuse of the money, the report noted “inadequate oversight” that included the lack of any notice that funds are available and little documentation on what it paid for. The total yearly amount of such grants has ranged from $4.3 million to $14.8 million, and they paid for such projects as demolishing a building and constructing a recreational trail.

“Many of the municipal representatives we interviewed told us that close relationships with their legislators were key to knowing about and receiving the allocations,” the report said.

The grant program was one of several problem areas highlighted in the Legislative Auditor’s yearlong investigation of the state’s mineral taxation. At an informational hearing at the Capitol Thursday, Legislative Auditor Jim Nobles told lawmakers they need to address problems with how the pool of money is distributed. The process “lacks transparency and predictability,” the report said.

The state’s largest mineral tax by far is the one levied on taconite. Mining companies pay the tax per ton of taconite produced, in lieu of property taxes.

The production tax generated more than $100 million last year, and is a lifeline for Minnesota’s Iron Range, which has struggled for decades to lessen its dependence on mining.

The taconite tax revenue feeds more than two dozen programs for northeastern Minnesota, including those run by the Iron Range Resources and Rehabilitation Board (IRRRB), a state economic development agency. But 10 of the 27 programs are guaranteed a minimum amount of money, and four enjoy a regular inflation increase the others don’t get, the study found.

As for the one-time grants, lawmakers dole them out during years there is a surplus in the Taconite Property Tax Relief Account, which is used to subsidize Range homeowners’ property taxes. However, state law doesn’t spell out how the surplus is to be spent.

Since 2007, there was only one year where agreements were written for every grant, the auditor reported. The auditor’s interviews with a sample of recipients indicated they used the funds appropriately, however.

The report does not call for an overhaul of the taconite tax, and did not focus on the IRRRB.

The hybrid state economic development agency, which captures about 40 percent of the annual taconite production tax, is the subject of a separate investigation the Legislative Auditor announced two weeks ago.

Jody Hauer, who headed up the “Mineral Taxation” evaluation for the Legislative Auditor, said the probe was requested by legislators.

Two Iron Range lawmakers, Rep. Jason Metsa, DFL-Virginia, and Rep. Tom Anzelc, DFL-Balsam Township, praised the report. In an interview Thursday, Metsa said he welcomed the advice and characterized the report’s recommendations as “easy fixes.”

Jennifer Bjorhus • 612-673-46830