oversight

Comments on H.R. 4187

Published by the Government Accountability Office on 1971-06-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                          For release on delivery
                                                          Expected at 10 a.m, EDT
                                                          Thursday, ..June 24, 19'71

                  UNITED STATESGENERALACCOUNTINGOFFICE
                          WASHINGTON,D.C. 20548
                              STATEMERTOF
          ELMERB. STAATS, COME'TROLLER
                                    GENERALOF THE UNITED STATES
                    BEFORECOMMITTEEON WAYSAND MEANS             ,.
                        HOUSEOF REPRESENTATIVES
                                  ON
            H.R. 4187 - THE GENERALREVENUESHARINGACT OF 1971

Mr. Chairman and Members of the Committee:
      We are pleased to be here today, at the invitation              of the Committee,
to offer     comments on H.R. 4187 which would authorize           a system of general
revenue sharing as recommended by the President               in his message to the
Congress on this     subject.    As an arm of the Congress, the General Account-
ing Office     is concerned principally    with accountability        as to the ex-
penditure     of funds appropriated   by the Congress.         My comments with
respect to H.R. 4187 will       deal primarily
                                           with this aspect of the proposal.
                                            q&&-
      It should be noted that at the outset\the BJ*esident's message to
the Congress on the subject       argues that general retznue sharing would
enhance, not weaken, accountability        in these terms:         "The best way to
hold Government accountable       to the people,    some suggest, is to be certain
taxing authority     and spending authority      coincide."       The message further

states:      "There is no reason to think that the local           taxpayer will   be
less motivated     to exert pressures concerning how shared revenues are

spent,"     noting that most local    taxpayers are also Federal taxpayers.
The message concludes             that     “the      crucial          question      is not where the money

comes from but whether                the official           who spends it               can be made to answer

to those          who are affected        by the choices               he makes.”

          Needless     to say,    this     is a sharply               different          concept    of accounta-

bility      for     the expenditure        of Federal           funds       than has existed            in the

past.       It     would bypass       the normal        process          by which         the Congress        au-

thorizes          the purposes    for     which      funds      are spent,          appropriates            funds,

and then provides            oversight        with    respect          to the efficiency             with     which

these      funds     are spent    and whether           they      are spent         for     the purposes

intended.

          The revenue      sharing       plan   embodied          in H.R.         4187 has been accurately

described          as a “no strings        attached”           deployment          of Federal        funds      in

that      such funds      are not required            to be used for               any specific         purposes

and no meaningful            accountability           is required.

Accountability           Provisions
in H.R. 4187

          Section     601. of the Act provides                 that      the Governor!             of each State

would be required     to give assurances to the Secretary of the ‘Il’reasury                                                    ’ :
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that      will use and account fok revenues shared by that State for

State      and local      governme                                    It also      requires    the State and
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local      govermnts         to usei                                  ssary          assure ac           lity

for      payments     received    and disbursements                   made to local          governments.             It

gives      the Secretary,        upon reasonable               notice,       access        to and the right                to

examine records           of State       and local       governments.               It     also    provides      that

State      and local      governments         provide        reports        to the Secretary            “as he may
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    reasonably           require.      ”      Section      901 provides              that     the Secretary             provide

    a report          to the President                and the Congress               as soon as practicable

    after      the end of the fiscal                    year.       All     of these          provisions         of course

    relate      to the operation                of the formula              for      distribution             of funds         rather

    than     to what the funds                 are used for           or how they             are spent.

             Section       3101 applies               a nondiscrimination                   provision         to all      funds

    made available               to State       and local          governments              under     the Act,         and pro-

    vides      that     when the Secretary                 determines             that      a State      has failed            to

    comply with           such provisions,               he shall          attempt          to secure         compliance

    by voluntary           means.           Failing      this,      he is to refer                  the matter         to the

    Attorney          General.         In keeping          with     the concept              of general         revenue

    sharing,          payments       by the Federal               Government             to each State          will     presum-

    ably be commingled                 with     the State          funds,         and the allocated              payments            by

    the States           to local          governments will               be similarly              commingled         with     local

    government           funds.        Therefore,          Federal         and State          and local         funds         become

    indistinguishable                and any examination                   of the use of funds                  would have

    to encompass            the total          of State,          local     and Federal              fknds.

             In brief,           the only       accountability              to the legislative                  branch,

    other      than      through       such oversight              hearings          the Congress             might     from time
                                               t-4
    to time       initiate,                     be in the form of reports                       of the Secretary                of the

    Treasury          to the Congress.                 And, even here,               the Secretary             would have

    complete          discretion           as to the substance                of these          reports.

             Some indication                of the substance               of such reports               is found         in the

    Secretary’s           testimony           before     this      Committee             on June 2 in which              he stated

    that     “financial            reporting          to the Treasury              will      be required          simply        to



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        assure       that     the money is spent                     for         a lawful         governmental           purpose         and

        in a nondiscriminatory                       manner.           !T!he local           voters,         rather      than     any

        Federal       official,            will      review         the wisdom and effectiveness                             of the

        expenditures.             I’     Elsewhere         in the same statement,                          he indicated           that

        “responsibility                  and accountability                      for     those      funds     will     * * * run to

        elected       State            and local      officials             rather          than      to employees           of the

        Federal       Government.            ”     From this,              I conclude             that      such reports          will      be

        largely       factual            in nature         and could              reflect         little      by way of evalua-

        tion      as to how effectively                     Federal              funds      had been spent.

        Reliance Upon State
        and Iocal Audits

                  As to compliance                 with      the allocation                  formula         and the adequacy               of

        fiscal       and accounting                procedures,              it     would      be expected             that    the Secre-

        tary      would      need to rely             heavily          on audits             by or for          the States           and

        local       governments.                 For any examination                      of the control              systems        of the

        States       and local            governments              relative            to how the commingled                  funds        were

        used,       he would            have to rely          almost             entirely         on such audits             since       the

        sheer       magnitude            of State         and local.             government           activities         would, as a
                                                                                                                          n &@?.& m”--
        practical           matter,        preclude          the Secretary                  from undertaking                   su’fir”h

        exsmination”;with                 Federal         resources.

                  Thus the validity                  of this          reliance            on audits          by or for          State      and

        local       governments            will      depend on the auditing                           capabilities           available           to

        these       governmental             units        either       through            their       in-house        organizations              or

        outside       sources            and the breadth               and depth             of auditing             at these le‘?els.
                                                                                                                      plJ!C&&,ir&,,Ql..~h$“Z~?‘
                  Our Office             is presently              engaged in an interagency                           study\ 4 ith eight

        of the Federal                  agencies      having          the largest                grant      programs,        to develop


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II
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               K#jaudit            standards for use in auditing     Federal grant programs.
                While addressed to grant programs, these standards will           be adaptable
                to audits   of other operations      in the public   sector.   It is expected
                that these standards will       be directed   to proper accounting,    efficient

                and economical management of resources,         and achievement of program

                   objectives by the best practical   means.
                  ".,,,/
              /...n- "&*-@
                          Information which the study group has obtained thus far indicates

                that not more than 10 or 12 St,&& may be considered as approaching
                                                 ,I'
                                               i.""
                adequate standards in theiraudit     operations. Many other States are
                                         ii.,i
                in varying stages of in&easing their audit capability,     but the outlook

                for satisfactory      au&ting at the State level appears to be some years
                                      ..'('
                away. Regardin$'l;;he subordinate governmental units (cities,       counties,
                                   ,P
                etc.) the situation appears even Less encouraging.       Most audits are
                               ,ip
                limited t$rfiscalexaminations       and do not include the efficiency   or
                          /
                econom/aspects of operations.        More serious, however, is the lack
                        /
                       /cognition by municipal officials   that adequate auditing is an
                            of good management; and that adequate auditing          includes
                                                         and effectiveness.




                 of the Congress should have the

                                                                 We believe    that the presence
                 of our Office     in the picture   co
          quality            and the development                      of a climate           conducive                 to the recog-
                         /
nition     of the importance                     of auditing                 at the State           and local                 levels.

Moreover,             the right      of access            by our Office                  as an agency of the fegis-

lative     branch            would be consistent                      with     the traditional                    oversight              role

and responsibility                  of the Congress.                         Therefore       if     the subject                  bill      is

to be favorably                 considered         by the Committee                      we recommend that                       the bill

be emended to provide                     for     access             by the Comptroller                   General,



         With         regard     to the matter                 of accountability                   and related                 audit       as

discussed             above,     we believe             that         the relationship               of general                 revenue

sharing         as proposed          and total             State         and local          government                 revenues

should     be kept             in perspective.                  It     is estimated               that         total     State           and

local     government              revenues        for      1971will              approximate              $130 billion.                    The

Administration                 has proposed             an amount of $5 billion                           for      general              revenue

sharing         for     1972.       This        amount,         while         substantial            in itself,                is less

than     4 percent             of total         State      and local             government              revenues for 1971.                                4”
                                                                                                                                    ;‘; !’ {Z ,h/, &“Z^i..2
                                                                                                                                            ,‘,i
                                                                                                              &%At-ii4 ~~&k&Y&~~.f           \’
There is a question,                 therefore,                              as to whether,              revenue sharing           !i
                                                                                                                           fl*:
would     give         the Federal          Government                any additional               leverage             toward           up-

grading         auditing         and other          financial                control      elements,               such as

budgeting,             accounting,          and reporting                    at the State            and local                levels.

Revenue Sharing and Modernization   of
Local Government Structure   and Operations

         One of the arguments                     made for             revenue          sharing          is that         it      would

place     greater            responsibility              on local             government           to determine                  how

governmental             programs          should        be carried              out.       While         it      is difficult


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to argue with              the principle             of decentralization,                  we believe           that     this

issue      should     be looked              at also        from the standpoint                 of whether            general

revenue         sharing      may actually             weaken one of the incentives                           to con-

solidate         or modernize              local     government         structure.

         The Cotittee               for      Econom;ic Development,                 in an excellent                report               ‘- ’

last     year     entitled          “Reshaping          Government         in Metropolitan                  Areas!’     pointed

out that         nearly      two-thirds             of our entire          population             today      is con-

centrated         in 233 metropolitan                   areas     compared with              only     55 percent             in

such areas          in l&O.               Yet,     in 1967,      the metropolitan                 areas      contained

nearly      21,000         units     of local          government         for     an average          of 91 local

governments          per metropolitan                  area.      The extremes             are represented                by the

Chicago      metropolitan                 area which          has 1,113         local     governments,             Phila-

delphia      with     871,         Pittsburgh          with     704, and Rew York with                      551,      contrasted

with     20 metropolitan                  areas which          had less         than     10 local         governments

each.

         The CED report              concludes          that     “the     existing         system of overlapping

Local      governments             results         in a poor match between                      needs and resources

and perpetuates              waste,          inefficiency,         and confusion.”                   The report           notes

that     the States          have been very                 slow in adjusting              boundaries           of local

governments          to meet the needs of metropolitan                                  areas     and recommends

that     both     State       and Federal            aid      systems be used as an incentive                           to

reduce      the number of local                     governments         and stimulate               local      government

reorganization.

         Some proposals              with         respect      to revenue          sharing        incorporate            re-

quirements          with      respect            to local      government          reorganization.                 While       we




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        have not had time              to examine           the proposition              in sufficient        detail         to

        justify         a firm     conclusion        with         respect     to the feasibility             of such

        provisions,          we do believe           it     is inevitable          that      general      revenue

        sharing         would     remove to some degree                 incentives          to consolidate          units

        of government             and improve        local         government      organization           as one way of

        saving         money and increasing                local     fiscal      resources.

                  It    is worth     noting      that one of the strongest  arguments made in
                                                    &+@
        support                                    local government units in the Indianapolis

        area was the savings                 which        could     be achieved          in administrative              costs

        and additional revenues which could be derived by
I, ,P         I ,,
            . The present mayor of Indianapolis,   who had a major                                           part       in

        bringing       about the consolidating   effort,                         has stated         on many occasions
              r&,,,,,n,.J,,,i !*frw
        that         has had this desired effect.

        Need for Improvements   in the
        Present Categorical   System

                  Two general        arguments            have been made for              revenue      sharing.          One

        is the argument             that     there        has developed          a fiscal      imbalance          between

        the Federal          Government         on the one hand and State                     and local       govern-

        ments on the other.                  The other            argument     is the difficulties                and

        problems         which     have developed            with      respect     to the categorical                grant

        sys tern.        While     the President’s                proposals      with     respect      to special

        revenue         sharing     have a particular                objective          of consolidating            a number

        of categorical             grants,      general           revenue     sharing       is likewise       supported

        from      a standpoint         of allowing           State      and local         governments        even wider

        flexibility             in how they      use Federal            funds.



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                 Studies       made by the General                       Accounting             Office      support      many of the

         criticisms        which         have been made with                     respect         to the present            system of

         grants-in-aid.             Many of these                 have been referred                     to previously            in

         these     hearings       --cumbersome             processing             procedures,             long   delays         in grant

         approvals,        high     overhead          costs,            delays     in notification               of available

         Federal      funds,      and so on.

                 The Intergovernmental                     Cooperation             Act of         1968 and the proposed
         Intergovernmental                Cooperation             Act of 1971,             if     enacted,would                go far       in

         mapping out a program                    to meet the objections                         which      have been raised

         with    respect       to the categorical                       grant     system.           The fact      that         so little

         has been done by way of consolidating                                    and simplification                   leads      us to

         question      whether           either     the executive                 branch         or the Congress            has

         seriously        tackled         the problem             of improving             the categorical               grant         system.

         For example,          we believe           that         consideration             should         be given       to more fre-

         quent     use of advance                 funding         so as to assure                 the State       and local

         governments        as to the level                 of support             on which          they     can make their

         own progra         and financing                 plans.          This     type         of advance       funding          has

         already      been authorized               for     certain             programs         such as title           I-A of the

         Elementary        and Secondary             Education              Act of        1965; grants           for     airports

         under     the Federal            Airport         Act;     and by the Economic                      Opportunity           Amend-

         ments of 2.969.            It      could    and should                 be used much more extensively.

         Use of Shared Revenues to
         Match Categorical Grants

                 One other        point       warrants            notice.          The bill          is silent          on the use of

         general      revenue       sharing         funds         for     matching         on categorical               grants.            Various


                                                                                                                                                 -Y-
statutes        in respect         of grant        programs                reqtire        use of funds              from non-

Federal        sources      for   matching.             Since         general           revenue          sharing      funds

will    not be separately              identifiable,                  it      might       be legally             construed

that    all     State     and local        government                funds       are,         in part,          Federal      funds.

To avoid        legal     complications,            we recommend that                          the bill          be amended to

specifically            provide     that    general         revenue              sharing          funds         may be used

for    matching         in categorical           grants.

        In summary:

        (a)      We do not believe               that      the Congress                                  should

                 be in a situation               where it             has appropriated                     or

                 authorized         money to be spent                       and then           not have

                 some way to independently                           assure          itself       that      these
                                                                                                                      \ \ 1, .+ I
                 funds      are being       spent        in a reasonably                       efficient            %+A!,‘L! \?&w~+

                 manner

            by it.
        (b) wedo            not think       it     realistic                to assume that                 in eases

                 of allegations            of misuse            or mismanagement                     of State

                 and local         programs        and where significant                           part         of the

                 funds      involved       are provided                    by the Federal                Government

                 that     the Congress           could      stand             idly      by and say that

                 this     is purely        a matter         for            the State           and Local          gov-

                 ernments         to handle.            We believe                 the Congress             must

                 have available            to it        an independent                    means of access

                 to the information                which        it         would      need to investigate

                 any such charge+


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            That concludes my statement,   Mr. Chairman.   We shall be pleased to
       respond to questions.




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