oversight

Highlights of a GAO Symposium: Addressing Key Challenges in an Intergovernmental Setting

Published by the Government Accountability Office on 2003-03-31.

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

               United States General Accounting Office

GAO

March 2003
               HIGHLIGHTS OF A
               GAO SYMPOSIUM
               Addressing Key
               Challenges in an
               Intergovernmental
               Setting




GAO-03-365SP
               a
                                                   March 2003


                                                   HIGHLIGHTS OF A GAO SYMPOSIUM

                                                   Addressing Key Challenges in an
Highlights of GAO-03-365SP                         Intergovernmental Setting




Responding to many of the nation’s                 Participants discussed key intergovernmental challenges facing all levels of
critical challenges—such as                        government and identified the following four as the most significant:
meeting the health care needs of
the poor or countering terrorist                   1. Mismatch between current revenues and spending demands.
threats—has been the joint
                                                   Increased spending demands and revenue shortfalls during economic
responsibility of all levels of
government. The effectiveness of                   downturns affect states’ ability to fund their share of key programs.
federal programs has increasingly                  Participants discussed the causes of the spending and revenue mismatch,
become dependent on state and                      federal and state options for addressing it, and their respective
local management and resources,                    advantages and disadvantages. Beyond current shortfalls, participants
as well as constructive interactions               focused on long-term structural fiscal pressures that will continue to test
between federal, state, and local                  the capacity of the intergovernmental system. Certain structural forces,
actors, including private and non-
                                                   such as changes in the global economy and the aging of the population,
profit actors who are joining with
government officials to carry out                  will continue to prompt stress on both the revenue and spending sides of
national policies and programs.                    the budget at all levels of government.

This increased interdependence                     2. Intergovernmental financing of health care, particularly long-term
among levels of government                         care for the elderly and disabled. Participants agreed that funding health
presents many challenges. While                    care costs for a growing aging population is the most significant
many policy areas have been                        intergovernmental fiscal challenge. Medicaid costs will likely continue to
nationalized and federally funded,                 grow at a high rate due to such factors as increasingly high health care costs
greater responsibility has been                    and the aging of the population. The discussion focused on the need to
devolved to state and local
                                                   restructure health care financing for the disabled and aged and to develop a
governments for implementing
programs to achieve national goals.                sustainable intergovernmental solution.
The intergovernmental system is
facing the complexity of managing                  3. Current tax structures at all levels of government and inter-
programs involving numerous                        relationships between them. Participants agreed on the need to
actors, and the flexibility and                    review the tax structures of all levels of government collectively and for
capacity of the federal system to                  policy makers to better consider the relationships between them. The
respond to unique local needs is                   national economy is becoming increasingly interconnected and global as
challenged by long-term national
and international trends.
                                                   business is conducted across state and national boundaries—potentially
                                                   undermining the capacity of current tax systems to reach transactions in
On November 20, 2002, GAO                          such an economy.
convened a symposium to identify
and discuss the key policy and                     4.Consider reassessing the assignment of responsibilities. In
fiscal issues facing the                           recent years, the federal government has continued to mandate new
intergovernmental system. The                      responsibilities for achieving national goals on state and local
invited participants represented
                                                   governments, by law or regulation. Participants agreed that the fiscal
federal, state, and local
governments, national associations,                and administrative resources of state and local governments vary and
public interest groups, and                        may not be sufficient to fulfill this increased responsibility for national
research and academic institutions.                priorities. One model involves sorting out intergovernmental functions
                                                   with the federal government assuming responsibility for functions that
www.gao.gov/cgi-bin/getrpt?GAO-03-365SP.
                                                   are redistributive in nature, and delegating other responsibilities to states
To view the full report click on the link above.   and localities.
For more information, contact Paul Posner at
(202) 512-9573 or posnerp@gao.gov.
Contents



Letter                                                                                              1


Appendixes
              Appendix I:    Participants Attending the November 20, 2002 GAO
                             Symposium—“Addressing Key Challenges in an
                             Intergovernmental Setting”                                             5
                             Introductory Speakers                                                  5
                             Participants                                                           5
             Appendix II:    GAO’s Symposium on Addressing Key Challenges in an
                             Intergovernmental Setting                                              7
                             Background and Highlights of the Discussion                            7
                             1. Mismatch Between Current Revenues and Spending Demands              8
                             2. Intergovernmental Financing of Health Care, Particularly
                                Long-term Care for the Elderly and Disabled                        14
                             3. Current Tax Structures at All Levels of Government and
                                Interrelationships Between Them                                    18
                             4. Consider Reassessing the Assignment of Responsibilities            22
                             Discussion of Need for an Ongoing Dialogue and Possible
                                Framework                                                          28
             Appendix III:   Summary of Introductory Remarks                                       31
             Appendix IV:    Intergovernmental Relations Symposium Slide
                             Presentation                                                          33
              Appendix V:    Grant Programs to State and Local Governments                         44


Figures                      Figure 1: Composition of Spending as a Share of GDP Assuming
                                       Discretionary Spending Grows With GDP and the Tax
                                       Cuts Do Not Sunset                                           9
                             Figure 2: State Spending by Function as a Percent of Total State
                                       Spending After 1, 5, and 10 Years                           16
                             Figure 3: Federal and State Revenue Trends                            19
                             Figure 4: Number of Federal Preemption Statutes Enacted Per
                                       Decade                                                      26
                             Figure 5: Summary of the Number of Grant Programs to State and
                                       Local Governments: Fiscal Year 2001                         44
                             Figure 6: The 20 Largest Grant Programs to State and Local
                                       Governments: Fiscal Year 2001 (obligations in billions)     45
                             Figure 7: Trend in the Number of Federal Grant Programs to State
                                       and Local Governments 1980-2001                             46



                             Page i                                                       GAO-03-365SP
Contents




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Page ii                                                                     GAO-03-365SP
A
United States General Accounting Office
Washington, D.C. 20548



                                    March 31, 2003                                                                 Leter




                                    Highlights of a GAO Symposium on Addressing Key Challenges in an
                                    Intergovernmental Setting

                                    Addressing many of the nation’s critical challenges—such as meeting the
                                    health care needs of the poor or countering terrorist threats—increasingly
                                    depends on the joint efforts of all levels of government. The effectiveness
                                    of federal programs has increasingly become dependent on state and local
                                    management and resources, as well as constructive interactions between
                                    federal, state, and local actors, including private and nonprofit actors.

                                    Consequently, the fiscal and policy fortunes of each level of government in
                                    our system are increasingly interdependent. While citizens have demanded
                                    federal action and many policy areas have become nationalized, this has
                                    been accompanied by a growing reliance on state and local governments to
                                    implement national goals. These arrangements confer mutual benefits: the
                                    federal government gains valuable political and fiscal partners and state
                                    and local governments gain federal resources and support.

                                    However, the increasing connections among governments in our system
                                    have also raised vexing governance challenges. State and local
                                    governments have been confronted with the challenge of addressing their
                                    own unique responsibilities while at the same time assuming stewardship
                                    for a growing number of national goals. The federal government must
                                    reconcile its accountability for achieving national outcomes with its
                                    growing reliance on independent third parties. It can be confusing for the
                                    public to identify responsibilities for outcomes when so many players at all
                                    levels of government are involved.

                                    The intergovernmental system is now being tested by a complex array of
                                    specific short-term and long-term challenges. For example, in areas ranging
                                    from homeland security to education and health care, federal, state, and
                                    local governments are facing an increasing range of daunting problems in
                                    managing programs involving numerous actors inside and outside of
                                    government. Moreover, the unique advantages of a federal system—the
                                    flexibility and capacity to respond to unique local needs—are challenged
                                    by long-term trends such as advances in technology and communications
                                    that span state and even national boundaries and inspire demands for
                                    consistent national regulatory and tax policies.




                                    Page 1                                                          GAO-03-365SP
Currently, the system’s challenges are most sharply defined by increasingly
acute expenditure and revenue pressures occurring at all levels of
government. In the near term, revenues have fallen, while other
developments, such as health care price increases, unexpected homeland
security threats, and the war against terrorism have greatly increased
spending demands at all levels of government. Over the longer term,
pressures will continue, driven in large part by the aging of the population.
At the same time, other trends, such as increased global interdependency
and rapidly advancing technology, could work to undermine tax bases as
more economic transactions occur within and across our nation’s borders.
In addition, state and local tax systems are not designed to adequately
capture services—the biggest growth sector of the economy. Together,
such trends present fiscal and policy choices that will become far more
difficult over time if not addressed in a timely fashion.

Recognizing that decision makers can greatly benefit from a better
understanding of the constraints and challenges that our federal, state, and
local partners face, GAO convened a symposium on November 20, 2002, to
discuss the key policy and fiscal issues facing the intergovernmental
system. The invited participants consisted of a cross section of current and
former federal, state, and local officials, as well as observers from
academia, think tanks, public interest groups, and the private sector. The
summary of the participants’ discussion reflects the views expressed by the
attendees and does not necessarily represent a complete perspective on
these issues or reflect the views of GAO.

As agreed with the participants, our goal was to reach consensus on the top
challenges facing the intergovernmental system and to engage in an open
and not-for-attribution-based dialogue. As expected, the forum participants
expressed a range of views on the challenges facing the intergovernmental
system. After a lengthy discussion, the following were identified as the
most significant intergovernmental challenges:

• mismatch between current revenues and spending demands;

• intergovernmental financing of health care, particularly long-term care
  for the elderly and disabled;

• current tax structures at all levels of government and interrelationships
  between them; and

• consider reassessing the assignment of responsibilities.



Page 2                                                           GAO-03-365SP
Another major topic of discussion was the need for ongoing dialogue about
national priorities and shared challenges. There was general agreement
that since the Advisory Commission on Intergovernmental Relations
(ACIR) was abolished, there has been a lack of a focal point and forum for
comprehensive discussions of intergovernmental issues and a formal
mechanism for forging partnerships. While no consensus was reached on
the type and format for such a renewed forum or focal point, we hope that
this symposium will serve as a springboard for future dialogue among
intergovernmental partners on the long-term challenges facing the nation
and advising the Congress on emerging domestic policy issues.

Appendix I provides a list of the symposium participants, and appendix II
provides highlights of the most significant challenges discussed by the
participants, as well as subsequent comments we received from them on a
draft summary of the discussion. It also includes a discussion of the need
for a forum for ongoing dialogue on intergovernmental issues. While
appendix II largely reflects the insights and perspectives of the
participants, it also contains additional information, such as that provided
in the background sections, to provide context and clarity for the
discussion. Appendix III provides a summary of introductory remarks
made by David M. Walker, Comptroller General of the United States, and
David Broder of the Washington Post. Appendix IV contains a set of slides
presented by GAO at the beginning of the symposium. This presentation
was designed to provide background information to spur the discussion
among symposium participants. Finally, appendix V contains an
informative summary of grants to state and local governments provided to
us by the Office of Management and Budget.

I wish to thank the participants for taking the time to share their knowledge
and provide their insights and perspectives on the important matters this
document discusses. We look forward to working with them on
intergovernmental issues of mutual interest and concern in the future. Key




Page 3                                                           GAO-03-365SP
contributors to this report were Ann Calvaresi-Barr, Thomas Yatsco, and
Amelia Shachoy.




Paul L. Posner
Managing Director, Federal Budget Analysis and
Intergovernmental Relations Issues, Strategic Issues




Page 4                                                        GAO-03-365SP
Appendix I

Participants Attending the November 20, 2002                                                        Appendx
                                                                                                          ies




GAO Symposium—“Addressing Key
Challenges in an Intergovernmental Setting”                                                          Append
                                                                                                          x
                                                                                                          Ii




Introductory Speakers   David M. Walker, Comptroller General of the United States, U.S. General
                        Accounting Office

                        David M. Broder, Columnist, Washington Post

                        Paul Posner, Managing Director, Federal Budget Analysis and
                        Intergovernmental Relations Issues, Strategic Issues, U.S. General
                        Accounting Office



Participants            Jonathan Breul, Director, Federal Management and Performance, IBM
                        Business Consulting Service (formerly with the United States Office of
                        Management and Budget)

                        Enid Beaumont, Georgetown Public Policy Institute, Georgetown
                        University

                        Tim Conlan, Associate Professor, Public and International Affairs, George
                        Mason University

                        Harley Duncan, Executive Director, Federation of Tax Administrators

                        Julia Friedman, Deputy Chief Financial Officer/Chief Economist,
                        Government of the District of Columbia

                        Natwar Gandhi, Chief Financial Officer, Government of the District of
                        Columbia

                        David F. Garrison, Vice President, National Academy of Public
                        Administration

                        William T. Gormley, Professor, Georgetown Public Policy Institute,
                        Georgetown University

                        Robert Greenstein, Executive Director, Center on Budget and Policy
                        Priorities

                        John Kincaid, Professor and Director, Meyner Center for State and Local
                        Government, Lafayette College

                        Iris Lav, Deputy Director, Center on Budget and Policy Priorities



                        Page 5                                                          GAO-03-365SP
Appendix I
Participants Attending the November 20,
2002 GAO Symposium—“Addressing Key
Challenges in an Intergovernmental Setting”




Larry Naake, Executive Director, National Association of Counties

Richard P. Nathan, Director, The Nelson A. Rockefeller Institute of
Government, State University of New York, Albany

Sue Nelson, Democratic Deputy Staff Director, Committee on the Budget,
United States Senate

Robert O’Neill, Jr., former President, National Academy of Public
Administration

Sallyanne Payton, Professor, The University of Michigan Law School

Scott D. Pattison, Executive Director, National Association of State Budget
Officers

William Pound, Executive Director, National Conference of State
Legislatures

Andrew Richardson, Majority Staff Director, Subcommittee on Oversight of
Government Management, Restructuring and the District of Columbia,
Committee on Governmental Affairs, United States Senate

Ray Scheppach, Executive Director, National Governors Association

Hannah Sistare, Visiting Fellow, The Brookings Institution

Christopher Smith, Counselor to the Secretary, Department of the Treasury

Carl Stenberg, Dean, College of Liberal Arts, University of Baltimore

Carl Tubblesing, National Conference of State Legislatures

Cameron Whitman, Director, Policy and Federal Relations, National League
of Cities

Henry Wray, former Senior Counsel, Subcommittee on Government
Efficiency, Financial Management, and Intergovernmental Relations,
Committee on Government Reform, House of Representatives




Page 6                                                         GAO-03-365SP
Appendix II

GAO’s Symposium on Addressing Key
Challenges in an Intergovernmental Setting                                                                   Appendx
                                                                                                                   Ii




Background and      This symposium was convened as a springboard to enhance constructive
                    discussions among federal, state, and local actors about national priorities
Highlights of the   and resources; discuss possible formats for an ongoing dialogue to forge
Discussion          links between all levels of government; help to shape GAO’s future work in
                    this area; and eventually advise the Congress on emerging domestic policy
                    issues. Our goal in sponsoring the symposium was to have participants
                    discuss the full range of challenges facing the intergovernmental system—
                    with an eye toward those that are long term in nature—and come to
                    consensus on the top challenges that need to be addressed collaboratively.



Discussion of Key   After introductory remarks, a lengthy discussion ensued of the key
Challenges          challenges facing the intergovernmental system. At the close of this
                    discussion, participants identified the top intergovernmental challenges
                    that need to be addressed collaboratively. Symposium participants
                    identified the following four as the top long-term intergovernmental
                    challenges:

                    • mismatch between current revenues and spending demands;

                    • intergovernmental financing of health care, particularly for long-term
                      care of the elderly and disabled;

                    • current tax structures at all levels of government and interrelationships
                      between them; and

                    • consider reassessing the assignment of responsibilities.

                    Each section of this summary is prefaced with supplemental background
                    information derived from introductory presentations,1 research and
                    interviews conducted by GAO in preparation for the symposium, and
                    previous GAO reports.




                    1
                      Introductory presentations were delivered by David M. Walker, Comptroller General of the
                    United States; Paul Posner, GAO Managing Director, Federal Budget Analysis and
                    Intergovernmental Relations Issues; and David Broder, Columnist, Washington Post.
                    Summaries of remarks by Mr. Walker and Mr. Broder can be found in appendix III and slides
                    presented by Mr. Walker and Mr. Posner can be found in appendix IV.




                    Page 7                                                                      GAO-03-365SP
                       Appendix II
                       GAO’s Symposium on Addressing Key
                       Challenges in an Intergovernmental Setting




1. Mismatch Between
Current Revenues and
Spending Demands

Background             After the economic boom of the 1990s, all levels of government are now
                       experiencing serious fiscal challenges, and are likely to face even more
                       fundamental ones in the future. In the short term, revenues are down, while
                       other developments, such as higher demand for health and long-term care
                       services, health care price increases, and unexpected homeland security
                       threats, have greatly increased spending demands. In addition, certain long-
                       term trends, such as the aging of the population, will continue to put
                       spending demands on federal and state governments, while other trends,
                       such as increasing global interdependency and advancing technology, will
                       likely affect traditional sources of government revenues by reducing tax
                       bases.

                       Current and projected fluctuations in resources have had serious
                       repercussions for the entire intergovernmental system. The federal budget
                       has moved from unprecedented federal surpluses of the late 1990s to
                       deficits. The Congressional Budget Office (CBO) now projects federal
                       deficits of $246 billion in fiscal year 2003 and $200 billion in fiscal year 2004
                       as the baseline before further policy actions.2 Along with a decline in
                       revenues, spending demands have increased. Within the past year alone,
                       the impact of the terrorist events of September 11, 2001, required the
                       federal government to take on greater responsibilities, health care costs
                       continued to grow at double-digit rates, and the war on terrorism has
                       increased defense needs.

                       Over the longer term, the retirement of the Baby Boom generation will
                       place greater demands on federal programs like Social Security, Medicare,
                       and Medicaid if they remain unchanged. Under most scenarios, rapidly
                       escalating and unsustainable deficits will emerge over the next several
                       decades absent structural changes to the spending or revenue side of the
                       federal budget (see fig. 1).



                       2
                        The March 2003 budget outlook under CBO’s adjusted baseline assumes discretionary
                       budget authority for 2003 will total $751 billion and grow with inflation thereafter.




                       Page 8                                                                      GAO-03-365SP
Appendix II
GAO’s Symposium on Addressing Key
Challenges in an Intergovernmental Setting




Figure 1: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows With GDP and the Tax Cuts Do Not Sunset

40 Percent of GDP




30                 Revenue




20




10




 0
            2000                       2015   2030         2050
     Fiscal year
             All other spending

              Medicare and Medicaid

              Social Security

              Net interest

Source: GAO’s January 2003 analysis.




The need to fund mandatory programs such as Social Security, Medicare,
and Medicaid—as well as increased spending for defense and homeland
security—will heighten tensions with other domestic spending priorities,
such as education, the environment, physical infrastructure, and housing
and community development. State and local officials worry that
heightened federal funding pressures could mean that state and local
governments will be faced with using more of their own resources to meet
service demands.

As greater expectations and spending pressures are being placed on states
and localities—including new federal initiatives such as raising educational
standards, enhancing homeland security, implementing election reforms,
and rising Medicaid costs—they are experiencing significant, recurring
revenue shortfalls that are negatively affecting their budgets. For example,
fiscal year 2002 personal income tax collections missed states’ targets by 13
percent and corporate income taxes were nearly 22 percent lower than



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                           Appendix II
                           GAO’s Symposium on Addressing Key
                           Challenges in an Intergovernmental Setting




                           projected. Revenue declines are generally attributed to factors such as the
                           economic downturn, the steep stock market declines, the events of
                           September 11, 2001, and tax cuts in certain states.

                           In response, 37 states reduced their fiscal year 2002 budgets by over $12
                           billion. This shortfall translated into reductions in aid to local governments,
                           hiring and salary freezes, cuts in infrastructure projects and discretionary
                           programs aimed at low-income individuals and families, and even across-
                           the-board spending reductions. Many states have also taken other actions
                           like tapping “rainy day funds,” using tobacco settlement funds, or raising
                           “sin” taxes. Further, as states have exhausted many of their options, they
                           are now faced with taking more dramatic actions to balance their budgets,
                           such as reductions in entitlement coverage and income tax increases. For
                           fiscal year 2004, projections released by the National Association of State
                           Budget Officers (NASBO) suggest that states will face a fiscal gap of over
                           $80 billion.



Participants’ Discussion   Participants agreed that fiscal stress on all levels of government are
                           greatest during periods of economic downturn like the current one, when
                           revenues are down. Participants noted that the current economic downturn
                           has been even worse than past ones—perhaps the most severe in the
                           postwar period. While increased spending demands and declines in
                           revenues are being felt at every level of government, some participants
                           observed that state and local governments do not have the flexibility to
                           weather a downturn like this one because, unlike the federal government,
                           many are precluded from having an operating deficit.

Near-term Fiscal Stress    Some participants observed that recent fiscal stress has undermined the
                           ability of states and localities to uphold their share of the
                           intergovernmental partnership in key policy areas in which the federal
                           government has a stake, including Medicaid, education, discretionary
                           programs for low-income individuals and families, and infrastructure
                           projects like roads, bridges, and improvements in public buildings. This has
                           repercussions not only for state and local governments’ ability to help the
                           federal government achieve national goals but also for those vulnerable
                           populations that rely on government for needed assistance and services.
                           Some participants further recognized that actions taken by states and
                           localities to close deficits—tax increases and deep spending cuts—could
                           serve to undermine an economic recovery overall, thereby offsetting at
                           least some of the economic stimulus provided by other federal fiscal and
                           monetary policy actions.



                           Page 10                                                           GAO-03-365SP
                 Appendix II
                 GAO’s Symposium on Addressing Key
                 Challenges in an Intergovernmental Setting




                 While most participants acknowledged the severe effects of the economic
                 downturn on state and local budgets, some pointed out that certain state
                 and local choices during prosperous economic periods significantly
                 contributed to their current budget crisis. Although in recent years states
                 have tried to build up reserves and “rainy day funds,” they also made
                 choices, such as cutting taxes and increasing spending, during the
                 prolonged economic boom of the 1990s. For example, between 1990 and
                 2000 state spending grew twice as fast as federal domestic spending. Once
                 the economic boom was over, some participants noted that the tax
                 structures and spending commitments they had entered into were no
                 longer sustainable. States have quickly used up much of their savings and
                 are taking or contemplating even more dramatic actions, such as increasing
                 income taxes and reducing spending levels, even in entitlement programs.
                 Some participants noted that states would not be in as serious a crisis
                 today if they had resisted pressures for large tax cuts and spending
                 increases and saved more during the 1990s. One participant observed that
                 states would have needed much larger reserves than they accumulated to
                 avoid deficits stemming from a downturn similar to that faced in the early
                 1990s—a downturn which now seems less severe in its fiscal impact than
                 the current period.

                 Participants also commented that the federal government has contributed
                 to the fiscal challenges of state and local governments by placing greater
                 responsibilities on them for achieving national goals and objectives. For
                 example, state and local governments are now being asked to improve
                 educational performance to meet national standards and enhance
                 homeland security preparedness. In addition, they are responsible for
                 paying for the rising costs of health care and long-term care needs for the
                 aged and disabled through Medicaid. For example, a participant observed
                 that Medicaid has grown from about 10 percent of total state budgets in
                 1987 to 20 percent today. Additionally, several participants observed that
                 recent federal tax cuts could further diminish the tax bases of other
                 governments, particularly states, since most states’ tax bases are linked to
                 the federal tax base.

Policy Options   Following the participants’ discussion about the nature and causes of the
                 mismatch between spending and revenues in periods of economic
                 downturn, participants talked in detail about options for addressing a
                 mismatch. Many participants discussed the need for short-term federal aid
                 to help the state and local sector weather this downturn. However, it was
                 also recognized that states and localities can do their share in the future by
                 building up “rainy day funds” and constraining unsustainable tax cuts and



                 Page 11                                                           GAO-03-365SP
                                 Appendix II
                                 GAO’s Symposium on Addressing Key
                                 Challenges in an Intergovernmental Setting




                                 spending increases, and working towards greater economy and efficiency
                                 across programs during healthy economic periods.

                                 Participants then discussed specific actions that the federal government
                                 could take to assist states in remedying any fiscal mismatch. A key option
                                 discussed centered on federal financial aid during economic downturns.
                                 Participants noted that federal aid would help implementation of state and
                                 local intergovernmental programs while also reducing the likelihood that
                                 states would make spending and tax choices that might undermine federal
                                 efforts to revive the economy.

                                 Participants then offered a few examples of the form that such aid could
                                 take. Examples mentioned included an enhanced federal Medicaid
                                 matching share and greater funding for homeland security preparedness.
                                 Others discussed a form of general revenue-sharing or countercyclical aid
                                 to be available during economic downturns. According to a few
                                 participants, key considerations that probably would need to be addressed
                                 prior to creating any countercyclical aid or general revenue-sharing
                                 program include: 1) the triggers for starting and ending the aid, 2) the
                                 formulas used to distribute the aid, 3) the conditions, if any, to be attached
                                 to the aid, and 4) the overall level of support to be provided.

                                 Most participants also acknowledged that increased federal assistance
                                 would likely result in larger federal deficits. While it is generally agreed that
                                 running deficits during downturns is not harmful to the economy in the
                                 near future, they noted that the federal government may find it difficult to
                                 limit increased aid to the period of economic downturn. In addition, a few
                                 participants worried that setting a precedent for federal aid could create a
                                 disincentive for states and localities to save for rainy days when the
                                 economy is strong. In response, one participant noted that a condition of
                                 federal aid could be that states would be required to have significant “rainy
                                 day funds” or reserves before triggering financial aid.

Longer-term Structural Factors   The symposium discussion then moved to longer-term structural factors
                                 that could also be contributing to the fiscal mismatch between spending
                                 and revenues. Most participants acknowledged that structural long-term
                                 forces, such as changes in the global economy and the aging of the
                                 population, are in part responsible for the mismatch that states are
                                 experiencing. For example, the aging of the population will create
                                 significant demands for Medicaid long-term care services, placing
                                 increasing fiscal pressures on states’ ability to fund their share of the
                                 program. On the revenue side, state revenue systems have not kept up with



                                 Page 12                                                             GAO-03-365SP
Appendix II
GAO’s Symposium on Addressing Key
Challenges in an Intergovernmental Setting




rapid technological developments in the economy. State sales taxes in
particular do not adequately capture services—the largest growth sector of
our knowledge-based economy—nor do they effectively tax the increasing
numbers of Internet and mail order sales. States have also faced challenges
in capturing income generated by increasingly global corporations.

The current intergovernmental grant system was another structural factor
that participants identified. This system is largely categorical in nature as
most funds are provided through defined programs offering little flexibility
for adapting to unique state and local needs. Some participants argued that
federal grants are not always provided in areas where state and local
spending needs are greatest or funding gaps are most serious. It was
further noted that the trend in favor of categorical grant programs is not
exclusive to the federal government, as state policy makers have shown a
tendency to do the same thing with regard to grants to local governments.
(For more information on federal grants, refer to app. V.)

Some participants then debated the pros and cons of consolidating the
hundreds of categorical grants into a series of block grants in several policy
areas related to the core services of government. Some state and local
interests contend that they would accept greater accountability
requirements, such as national performance goals, from the federal
government in exchange for greater funding flexibility. Major areas
identified as possible targets for consolidation include education, health
care, employment and training, the environment, and physical
infrastructure. However, other participants expressed concern about block
grants as past experiences have shown that increased state and local
flexibility has often been accompanied by federal funding cuts. The
Congress also tends to provide less funding for these broader purpose
programs over time. For example, the consolidation of several categorical
grants into the social services block grant in the 1980s resulted in an overall
decrease in total funding to states for those services.

Other participants raised concerns about whether block grants could
constrain the federal government’s oftentimes legitimate need to fill gaps in
areas where state and local governments have not been providing sufficient
funding. One example offered centered on federal education funding,
which had been largely targeted at low-income and special needs students
while state and local education funding for the most part was aimed at the
general student population.




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                         Appendix II
                         GAO’s Symposium on Addressing Key
                         Challenges in an Intergovernmental Setting




                         One participant highlighted the emergence of a new model for
                         intergovernmental grants, referred to as performance partnerships. As
                         implemented by agencies like the Environmental Protection Agency, the
                         goal of a performance partnership is to provide states with greater
                         flexibility in shifting federal funds among categorical programs while
                         establishing more rigorous state accountability for federal performance
                         goals and measures.

                         Participants emphasized that solutions to these challenges need to be
                         addressed collaboratively. Earlier in the day, David Broder of the
                         Washington Post framed this critical issue in his introductory remarks.
                         (See app. III for a summary of the introductory remarks.) In his view, the
                         fiscal policy making process at the national level has a fundamental
                         weakness: even though actors at all levels of government are increasingly
                         focusing on common goals and jointly funding and implementing programs,
                         decision making still proceeds along compartmentalized lines. Specifically,
                         Mr. Broder said the federal government frequently acts in isolation of state
                         and local needs and impacts, often taking credit for new benefits while
                         shifting costs and burdens of making hard fiscal choices to states and
                         localities, who operate under more constrained fiscal rules. Accordingly,
                         many participants agreed with Mr. Broder that a forum is needed in the
                         national fiscal debate where officials at all three levels of government can
                         have serious, collective, and ongoing discussions about national goals and
                         resources.



2. Intergovernmental
Financing of Health
Care, Particularly
Long-term Care for the
Elderly and Disabled

Background               The division of responsibility between federal and state governments for
                         the health and welfare of citizens has traditionally differed for particular
                         clientele. The federal government has been primarily responsible for
                         assistance and health care for the elderly and the disabled through
                         programs like Medicare, Social Security, and the Supplemental Security
                         Income. Financing and administering programs targeted at children and



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families have largely been a shared responsibility between federal and state
governments.

These established roles have become blurred under the Medicaid program.
Although the program is widely perceived as providing health care for low-
income families and children, in recent years the program has become the
main source of financing health and long-term care for the elderly and
disabled—over 60 percent of Medicaid spending is now devoted to care for
these groups. The program has also assumed responsibility for financing
the Medicare premiums for low-income elderly (known as dual eligibles).
Eighty-two percent of projected Medicaid expenditure growth reflects
increases in the cost of caring for aged and disabled beneficiaries, and
states share this burden with the federal government, paying an average of
43 percent of the total costs.

The burden of funding health and long-term care for the aged and disabled
has been growing as a share of both federal and state budgets. For
example, Medicaid spending already comprises a large portion of most
state general fund expenditures–an average of 15 to 20 percent. In the short
term, spending growth has been fueled by factors such as overall health
care cost growth, particularly in prescription drugs, and increasing costs of
long-term care services. In response, most states have either taken or are
now contemplating a mix of cuts in Medicaid coverage, increased
copayments, and eligibility reductions. In the future, demand for Medicaid
services, particularly long-term care, will grow even more as Baby Boomers
begin to age. As a result, Medicaid is expected to encompass even higher
percentages of federal and states budgets—estimates show Medicaid will
be approximately 26 percent of states’ total budgets in 5 years and 33
percent 10 years from now.3 (See fig. 2.) The President’s Fiscal Year 2004
budget proposes new flexibility for states in serving nonmandatory
Medicaid populations—federal funds would be increased in the near term,
but the open-ended federal commitment for financing Medicaid would be
capped. The impact of this proposal on state budgets and health care
services is being debated.




3
 National Association of State Budget Officers September 2002 estimates.




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Figure 2: State Spending by Function as a Percent of Total State Spending After 1, 5, and 10 Years

                        After 1 year                                               After 5 years                                After 10 years



                                       21.8%                                                                                    33.6%
                                                                             26%
           20.8%                                                                                   20.6%
                                                                                                                                                     18.3%

                                                  11.2%
                                                                                                    10.5%
                                                                                                                         26.5%                      9.4%
                                                           2.2%         29.2%
                31.6%
                                          8.8%           3.7%                                                2.0%
                                                                                           8.1%
                                                                                                          3.4%                          7.3%         1.8%
                                                                                                                                                  3.1%

                                                                     Medicaid

                                                                     Elementary and secondary education

                                                                     Higher education

                                                                     Public assistance

                                                                     Corrections

                                                                     Transportation

                                                                     All other

Source: National Association of State Budget Officers.


                                                             Note: Assuming current growth rate for Medicaid and current average growth for all other categories.


                                                             Health care spending creates stress at the federal level as well. Combined
                                                             federal/state spending for Medicaid grew at an annual average of 11 percent
                                                             between 1980 and 2000. Over the longer-term, federal spending on health
                                                             care will be the fastest growing element of spending—federal outlays for
                                                             Medicare and Medicaid are projected to nearly triple as a share of GDP
                                                             over the next 75 years.

Participants’ Discussion                                     This discussion began with the majority of participants emphasizing
                                                             concern over Medicaid spending growth. Specifically, everyone was in
                                                             agreement that Medicaid spending has grown rapidly in the past 2 years
                                                             and will continue to do so because of rises in costs related to health care
                                                             services, particularly prescription drugs, and greater demands for long-



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term care. Moreover, it was noted that other national trends, such as the
aging of the population and the retirement of Baby Boomers, would create
even greater demands for health and long-term care services over the next
several decades, and consequently drive spending upward. There was
unanimous agreement that funding health care costs for a growing aging
population is clearly one of the biggest shared challenges for all levels of
government and that the country is on the cusp of a crisis in health care
and long-term care.

There was general agreement that states are not well positioned financially
to meet the future demands related to Medicaid, and that current
arrangements may not be sustainable in the future. While all levels of
government will be faced with very large health and long-term care
demands once the Baby Boomers retire and age, there was general
agreement that the burdens will fall heavily on states. Participants
observed that this not only has consequences for states but for
beneficiaries of the program. Due to state balanced budget requirements,
program benefits and policies will be affected by cyclical fiscal shocks
which will prompt episodic series of cuts, constraints, tax increases, and
cost shifts to providers and beneficiaries. Indeed, all participants agreed
that we are seeing this now. For example, many states have lowered
payment rates to providers, eliminated optional services like dental care,
and tightened eligibility requirements.

As a result, participants agreed there is a pressing need to reevaluate
intergovernmental financing of health care for the disabled and aged, who
account for the majority of costs. Several participants representing state
governments argued that if the federal government took over responsibility
and related costs for Medicaid long-term care, this alone would address the
states’ fiscal problems, allowing states to more easily finance most other
spending priorities. The same participants justified this argument by
observing that funding states’ share of Medicaid long-term care costs is
clearly the biggest spending demand in the future, as it will increasingly
absorb state resources.

Other less daunting options for assisting states in financing health and long-
term care for the aged and disabled were also presented by some
participants. One option discussed was increasing flexibility in grants to
help states better tailor funds for the particular needs of their aged and
disabled populations. Another option advanced by a few participants
involved enhancing the federal share of Medicaid matching funds on a
temporary or permanent basis.



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                           Financing the long-term care of the aged and disabled constitutes a long-
                           term fiscal challenge that will increasingly destabilize the finances of all
                           levels of government in our system. While participants concluded that
                           current financing arrangements have created unsustainable fiscal burdens
                           for the states, they also acknowledged that increasing federal fiscal
                           responsibilities would add further stress to the longer-term federal budget
                           outlook that is already confronted with the burdens of sustaining funding
                           for Medicare, Social Security, as well as its current share of Medicaid.
                           Accordingly, participants agreed that this situation calls for a serious
                           dialogue involving stakeholders from all levels of government regarding the
                           appropriate roles of governments in caring for the aged and disabled.



3. Current Tax
Structures at All Levels
of Government and
Interrelationships
Between Them

Background                 The revenue challenges facing state and local governments stem from
                           cyclical fluctuations in the economy, which states historically have been
                           able to overcome, as well as long-term structural characteristics. These
                           problems could serve to undermine the longer-term fiscal viability of state
                           and local revenue systems in a global economy. In the short term, the
                           economic downturn has resulted in the rapid decline in revenue from
                           taxation on personal income, corporate profits, and capital gains. Further,
                           the forces that drove income and economic growth may not be repeated on
                           the scale of the late 1990s. Similarly, the federal government has
                           experienced quick declines in tax revenues (see fig. 3).




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Figure 3: Federal and State Revenue Trends
 15 Real year-over-year quarterly percent change




 10




  5




  0




 -5




-10




-15
      1996Q1       1997Q1             1998Q1             1999Q1              2000Q1             2001Q1          2002Q1

        State tax revenue
        Federal revenue
Source: State tax revenue from Rockefeller Institute/NASBO. Federal revenue from Bureau of Economic Analysis,
Department of Commerce.




In addition, certain long-term structural forces are serving to erode the
traditional revenue bases of states. State and local sales taxes, for instance,
are levied on the retail sales of products. However, as the service economy
grows as a share of total revenues, the economy of the 21st century is
increasingly geared toward providing services that are not captured by the
sales tax in most states. States also have difficulty imposing this tax on the
growing market of remote sales from mail orders or the Internet. Because
of the complexity of dealing with thousands of taxing jurisdictions each
with its own tax rates and base, the U.S. Supreme Court has held that,
absent authorization from the Congress, state or local governments cannot
require out-of-state vendors to collect sales or use tax unless the vendor
has a physical presence in the state. Buyers are actually required to pay
sales taxes directly to their states, but they rarely do and the policy is
effectively not enforced. While no one has developed a reliable estimate of


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                           the amount of tax revenue losses on all remote sales, the losses will
                           increase as remote sales increase. Moreover, states face growing
                           difficulties in tapping sources of individual and corporate income—as
                           financial transactions and corporations have become more global.

                           State and local governments have taken some actions to modernize and
                           coordinate their tax systems. For example, the Streamlined Sales Tax
                           Project has laid the foundation for coordinating sales tax administration
                           and methods of collection across the nation. This project is intended to
                           simplify and make the sales and use taxes more uniform for all types of
                           retailers by providing common definitions across states. If states simplify
                           and standardize their tax systems, this could reduce the administrative
                           burden of tax collection on remote vendors, and may help facilitate
                           congressional action to provide states with the authority to require remote
                           vendors to collect the sales tax.



Participants’ Discussion   Participants agreed that there is a pressing need to look at the tax
                           structures of all three levels of government collectively, and for policy
                           makers at all levels to better understand the relationships between them.
                           They agreed that the U.S. economy is becoming increasingly
                           interconnected and global as American companies conduct business across
                           state and national boundaries. Economic globalization creates a need for
                           greater legal, financial, and regulatory uniformity among units of
                           government within and outside the United States.

                           Participants representing state and local interests worried that the effects
                           of the global economy place states and localities in a precarious position,
                           driving greater centralization of authority at the federal level, and eroding
                           available state and local revenues. Currently, industries must deal with a
                           patchwork quilt of state and local tax systems and regulatory policies,
                           which impede the ability of multinational and interstate businesses to
                           operate efficiently and effectively across jurisdictions. Economic
                           globalization has spurred efforts by business to promote greater legal,
                           financial, and regulatory uniformity among units of government. The
                           federal preemption of Internet sales taxation is but one example of a
                           growing trend affecting many areas of state and local authority.
                           Accordingly, the key question considered by most participants was what
                           redesign of our tax structures is appropriate for the modern economy so
                           that the needs and interests of states, localities, and the federal government
                           are respected?




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A basic problem raised by most participants is that changes in the global
economy have made the design of current tax systems increasingly
obsolete. Specifically, the fragmented sales tax system is not designed to
capture services, the biggest growth sector of our knowledge-based
economy, nor can it effectively tax a significant portion of sales made by
remote sellers through the Internet or mail orders.

For the most part, participants agreed that some tax reform is needed at
the state and local levels, stating that some standardization of tax policy
across states should be on the table. Participants representing state and
local interests pointed to the Streamlined Sales Tax Project as a move in
the right direction—one that responds to the demands of the global
economy. If adopted by the states, the project promises to reduce burdens
experienced by national and multinational businesses by harmonizing sales
tax bases, rates, and rules across the states.

Because most state tax systems are closely linked to the federal tax code,
participants felt that federal policy makers also need to better address the
effects of any tax-related decisions on other levels of government.
Specifically, due to the linkage of federal and state income tax bases,
changes made by the federal government to reduce taxes could also serve
to reduce state tax revenues. Some participants noted that in recent years
federal tax policy changes have been made without adequately considering
the effects on state and local governments. According to some participants,
states have already felt the negative impacts from recent tax policy
changes, which have exacerbated their current fiscal crisis. Although state
tax bases can decouple from the federal tax base, this would likely increase
enforcement burdens for the states and compliance burdens for taxpayers.
Participants argued that no forum or formal mechanism exists for federal
policy makers to consider the impact of their own tax policies on state and
local tax systems. One participant suggested establishing a formal process
for estimating the effects of proposed federal tax policy changes on state
and local governments.

On a final note, participants related that in many instances the taxing
authority at the state and local levels also has been restricted by either the
legislature or the public through voter initiatives. This situation has put
policy makers in a bind in responding to fiscal crises. In states with tax
limitations, one of the few options during this downturn is to cut program
services at a time when those most in need are even more vulnerable.
Participants observed that there is a strong antitax, antigovernment feeling
among a large segment of the population and this sentiment needs to be



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                   reflected in the dialogue about intergovernmental issues, particularly with
                   regard to the ability of state and local governments to fund their shares of
                   intergovernmental programs. One participant suggested that public
                   officials at all levels of government need to better understand why the
                   public has these feelings and attempt to address the root causes of public
                   disaffection with government.



4. Consider
Reassessing the
Assignment of
Responsibilities

Background         In recent years, state and local interests have reported that their program
                   and fiscal responsibilities are not matched with adequate resource
                   capacity. State and local governments have assumed many new program
                   responsibilities in areas such as education, health care, welfare, and
                   homeland security. At times, states have assumed added responsibilities
                   through greater devolution of federal programs; other new responsibilities
                   have come in the form of mandates and other requirements placed upon
                   them by the federal government. Welfare reform is a key example of
                   devolution, in which states lobbied for and received significant new
                   authority to implement innovative and tailor-made approaches to training
                   and employment. States have also sought and received greater program
                   responsibility and flexibility from the federal government through program
                   waivers—particularly in Medicaid and the State Children’s Health
                   Insurance Program.

                   At the same time, many new responsibilities have been placed upon states
                   and localities by the federal government. For example, within the past 2
                   years, the federal government has required states and localities to begin
                   meeting new educational standards, carry out significant upgrades to
                   voting systems, and improve their ability to respond to public safety
                   threats. To carry out these program responsibilities effectively, state and
                   local governments must have substantial administrative capacity—e.g.,
                   adequate information technology systems and staff with sufficient skills—
                   in addition to fiscal resources. While states and localities have improved
                   their administrative capacity over the past several decades, there are still
                   major capacity differences among these governments. Further, the recent



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economic downturn and related reductions in revenue collections, as well
as long-term forces, such as globalization, that are reducing some state and
local tax bases, could challenge their ability to carry out their current and
added responsibilities.

Some students of the federal system have observed that each level of
government has unique comparative advantages over certain kinds of
service and program areas. Paul Peterson, for instance, suggests that
intergovernmental competition gives states and localities incentives to
reduce tax and regulatory burdens to attract stronger tax bases.4
Accordingly, state and local governments arguably have strong incentives
to promote education and economic development programs that can
enhance prospects for local investment in their economies. However, this
argument also suggests that competition may undermine state and local
support for other policy areas, such as social welfare, in which strong
government programs could be viewed as discouraging economic activity
and growth.

Some observers believe that the growth of federal roles and responsibilities
over time has blurred these distinctions. The federal government has come
to subsidize and influence traditional areas of state and local control such
as education and criminal justice, while also mandating increasing state
and local fiscal responsibilities for such social welfare areas as health and
long-term care. The result is the intergovernmentalization of nearly every
domestic responsibility, which has prompted tensions across governments
and confused accountability for program results. Observers like Alice
Rivlin have proposed a sorting out and reallocation of intergovernmental
roles and responsibilities.5 Under this scenario, state and local
governments would assume primary responsibility for areas where they
enjoy a comparative advantage—such as education and housing—while the
federal government would assume national responsibilities for policies and
financing for areas, such as health care, to better promote national
standards and services.




4
  Paul E. Peterson, The Price of Federalism (Washington, D.C.: The Brookings Institution,
1995).
5
 Alice Rivlin, Reviving the American Dream (Washington, D.C.: The Brookings Institution,
1992).




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Participants’ Discussion   Across the board, participants were in agreement that state and local
                           governments have assumed a growing number of new program
                           responsibilities, and simultaneously the funding burdens that accompany
                           them. While states and localities have assumed some program
                           responsibilities by choice or by agreement with federal policy makers,
                           participants also identified what they saw as a troubling trend. Specifically,
                           they stated that in recent years the federal government has continued to
                           mandate costly new responsibilities on state and local governments, by law
                           or regulation. Participants quickly agreed that there is a definite disconnect
                           between the responsibilities that state and local governments have in key
                           program areas and the fiscal and administrative resources needed to carry
                           out those responsibilities. In addition, participants emphasized that along
                           with these mandates comes the requirement that states and localities bear
                           the responsibility of achieving national goals and priorities. Some
                           participants summed up this phenomenon as national dominance without
                           direct national delivery.

                           According to many participants, the disconnect between responsibility for
                           achieving national goals and needed resources is most pronounced in
                           policy areas such as education; health care for the poor, aged and disabled;
                           and homeland security. The main problem, according to some participants,
                           is that the federal government has not given states and localities adequate
                           funding to achieve federally imposed responsibilities and expectations in
                           such critical policy areas. Accordingly, states and localities are increasingly
                           being forced to choose between using scarce resources to achieve national
                           goals as mandated by the federal government and funding their own local
                           policy priorities. As a result, local priorities often get crowded out in a
                           system where federal or national goals encumber a growing share of state
                           and local budgets. Further, many participants observed that while the
                           disconnect between resources and responsibilities is largely structural in
                           nature—too many responsibilities that are not matched with a sufficient
                           revenue base or enough federal funding—it has been exacerbated by the
                           current, prolonged fiscal crisis.

                           The participants’ discussion addressed the capacity of the state and local
                           sector to carry out these national responsibilities. Some participants noted
                           that fiscal and administrative capacity continues to vary widely across
                           states and localities, resulting in varying degrees of program performance,
                           quality of service delivery, and level of services provided. Many noted that
                           the current fiscal crisis has added to this problem as state and local budget
                           cuts undermine their administrative capacity and services—e.g., hiring and
                           salary freezes and cuts in technology improvements. A few participants


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argued that effective and consistent implementation of national goals and
intergovernmental programs could be promoted by federal initiatives to
help overcome disparities in fiscal and administrative capacity among state
and local governments.

Participants indicated that the mismatch between responsibilities is
greatest at the local level. They observed that, over the past 15 years,
county and city government responsibilities have expanded. Mandates
from both the federal and state governments have hit local governments
the hardest and they often have the least fiscal and administrative capacity
or authority to address them. Further, some participants observed that the
increased responsibilities of local governments have not been met with
increased financial support from either the federal or state governments, or
added authority to raise revenues. Most participants agreed that policy
makers at the federal and state levels must find a better way to balance
differences between local governments, and recognize the particular
challenges faced by those jurisdictions with the least resources and the
weakest tax bases.

The District of Columbia was highlighted as a vivid example of the many
fiscal and administrative capacity concerns that had been raised by
participants throughout the day. From a city’s perspective, states have all
the power, the federal government has all the money, and cities have all the
problems. Participants observed that there are major variations in fiscal
and administrative capacity among local governments in the Washington,
D.C. metropolitan area. These same participants discussed the unique
needs of the District of Columbia, indicating that it must carry out state and
local responsibilities, as well as the challenges associated with being the
Nation’s capital. The District is uniquely constrained because it has city and
state responsibilities without full state autonomy or revenue-raising
authority, along with bearing the challenges of being the capital city.6

Another increasingly prominent trend—preemption of state and local
authority—was identified among participants as being especially
problematic and placing state and local governments in a precarious
position (see fig. 4). The most striking example is related to the federal
restriction on Internet taxation. Further, participants noted the growth of
federal preemption across a wide range of traditional state and local


6
 GAO plans to issue a report on the structural fiscal issues of the District of Columbia in May
2003.




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                                                                    functions varying from health care to law enforcement. Some participants
                                                                    attributed increasing federal preemption to the demands of the global
                                                                    economy for greater regulatory uniformity.7



Figure 4: Number of Federal Preemption Statutes Enacted Per Decade

130 Number
120                                                                                                                                                                                         1999
                                                                                                                                                                                            est.*
110
100
 90
 80
 70
 60
 50
 40
 30
 20
 10
  0
      Before             1900-             1910-             1920-              1930-             1940-            1950-             1960-             1970-             1980-              1990-
       1900              1909              1919              1929               1939              1949             1959              1969              1979              1989               1999
      Year

                                                                          Civil Rights and other

                                                                          Health, safety, and environment

                                                                          Commerce and transportation

                                                                          Banking, finance, and taxation

Source: U.S. Advisory Commission on Intergovernmental Relations, Federal Statutory Preemption of State and Local Authority: History, Inventory, and Issues (Washington, D.C., 1992), p.7.




                                                                    Participants concluded by discussing options for addressing the mismatch
                                                                    between the resources and responsibilities of state and local governments.
                                                                    One option that generated a lively discussion was sorting out
                                                                    intergovernmental functions, in light of growing concerns about fiscal and
                                                                    management capacity. Alice Rivlin’s proposals, as laid out in Reviving the
                                                                    American Dream, were suggested as a possible basis for such a sorting out


                                                                    7
                                                                    See U.S. General Accounting Office, Regulatory Programs: Balancing Federal and State
                                                                    Responsibilities for Standard Setting and Implementation, GAO-02-495 (Washington, D.C.:
                                                                    March 20, 2002) for more background on regulatory programs.




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of responsibilities. Along these lines, the participants talked about making
health care a federal responsibility and delegating other responsibilities,
such as education and physical infrastructure, entirely to states. However,
most participants warned that any attempts at sorting out should be taken
slowly and tested in certain policy areas. Some noted that the tradeoffs
associated with broad sweeping realignments are complex and prompt
deep concerns and resistance among many stakeholders.

Participants suggested that long-term care would be a good candidate for
sorting out roles and responsibilities. The growing demand and costs for
these services have been major drivers of state fiscal stress. Moreover, the
cyclical nature of state budgeting subjects long-term care, along with other
state funded services, to episodic cuts during economic downturns.
Benefits and service levels vary significantly across the nation, reflecting
the primary role played by states in determining program policies.

While diversity and choice are the hallmarks of a vital federal system, an
increasingly aging nation may come to place a higher value on uniformity
and standardized benefits for long-term care across the nation. For social
security and disability programs, financing and delivery of benefits has long
been a primary federal responsibility, reflecting national expectations for
uniform treatment for these potentially vulnerable populations. If the
federal government assumes greater responsibility for financing long-term
care, it may also be necessary to rethink current federal responsibilities for
financing other programs delivered by state and local governments in order
to free up sufficient resources at the national level.

One participant observed that, in the early 1980s, states had the
opportunity to achieve such a fundamental resorting of roles—when the
federal government offered to assume full financial responsibility for
Medicaid in exchange for states taking on welfare (known as “Swap and
Turnback”). States rejected this offer and many participants representing
state governments indicated that they now regret this decision.
Participants agreed—at the very least—that more intergovernmental
coordination and collective policy making are necessary so that key policy
decisions are not made in isolation, and policy makers understand the
burdens that their actions might place on the fiscal and administrative
capacity of another level of government. This call for greater coordination
and collaboration is a theme that ran throughout the day and underscores
all of the top intergovernmental challenges.




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Discussion of Need for     A significant portion of the day focused on a perceived need raised by all
                           participants regarding the lack of a focal point and forum for a
an Ongoing Dialogue        comprehensive discussion of intergovernmental issues. Participants
and Possible               generally agreed that since the demise of the Advisory Commission on
                           Intergovernmental Relations (ACIR) there has been a void in this area.
Framework

Background                 ACIR was an independent intergovernmental agency established in 1959 to
                           improve the ability of federal, state, and local governments to work
                           together cooperatively, efficiently, and effectively. ACIR was created with a
                           recognition that each level of government had an important and distinct
                           role to play in formulating and administering policies. It was comprised of
                           appointed and elected officials from all three levels of government. The
                           ACIR was charged with several responsibilities: to bring together
                           representatives of federal, state, and local governments to address
                           common problems; to provide a forum for discussing the administration
                           and coordination of federal grant programs; to provide research and make
                           recommendations to the executive and legislative branches on the
                           allocation of government functions; and to recommend methods of
                           coordinating and simplifying tax laws and administrative practices to
                           achieve a more balanced relationship between the levels of government.
                           Over the years, ACIR conducted research on a variety of subjects related to
                           the federal, state, and local governments. For example, it studied and
                           commented on law enforcement, transportation policy, welfare, and
                           environmental protection, as well as a host of other policy issues.
                           Throughout the 1980s, congressional support for the ACIR declined for a
                           number of reasons. The loss of consensus on many policy issues and the
                           federal budget deficit were among the factors contributing to loss of
                           support in the Congress. Several controversial reports in the 1990s
                           heightened calls for its termination and it was abolished in 1996.



Participants’ Discussion   Most participants agreed that there is a need for a national focal point to
                           address intergovernmental issues. They observed that the biggest void has
                           been in the lack of consistent data collection and analysis. ACIR used to
                           collect data and publish results regularly on state and local fiscal policies
                           and conditions. According to participants, sophisticated analysis of policy
                           issues from an intergovernmental perspective is also sorely missed. For
                           example, an institutional focal point could help policy makers sort through
                           issues and options for federal aid to states during downturns; such a focal



                           Page 28                                                          GAO-03-365SP
Appendix II
GAO’s Symposium on Addressing Key
Challenges in an Intergovernmental Setting




point could also highlight the intergovernmental implications of federal tax
policy changes.

Some participants observed that some organizations within specific policy
sectors perform intergovernmental coordination, but it tends to be on an
issue-or program-specific basis. For example, the Environmental Council
of States, the National Association of State Child Care Administrators, and
the National Association of Medicaid Administrators frequently meet with
their federal counterparts. However, participants commented that the
primary focus of these meetings is not policy research, rather the goal is
usually to better understand each other. Broader based organizations such
as the National Governors Association and the National Council of State
Legislatures represent state interests, but the primary focus of these
organizations is not necessarily to produce systemic research for a national
audience.

Participants also discussed what form such an organization could take.
Time limitations did not allow for a full discussion of the form and
structure of such a focal point. Participants noted the importance of
avoiding some of the difficulties ACIR encountered. For example, it
became increasingly difficult for ACIR to reach bipartisan consensus on
issues with its members and encourage active participation by high-level
federal officials.

Participants contended that, under any circumstance, an essential
component of a future organization would be to ensure it has a
constructive working relationship with state and local interest groups and
others on the front lines of state and local governments. According to
participants, a strong analytical function is also a critical component and it
was agreed that a body of talented analysts could provide legitimacy to
intergovernmental issues. Participants also acknowledged that the
challenge is how to obtain consistent data and a framework for analysis,
and how to fund these efforts. Any organization would likely need
sustained financial support from federal, state, and local or private sources.
Moreover, some argued that continuing federal involvement is critical to
promote a full intergovernmental forum and national attention to the issues
raised.

There was disagreement among participants about whether there is a
sufficient demand at the federal level to create and sustain any forum.
According to some participants, while an intergovernmental focal point is a
good idea in theory, in practice it is difficult to generate interest at the



Page 29                                                           GAO-03-365SP
Appendix II
GAO’s Symposium on Addressing Key
Challenges in an Intergovernmental Setting




federal level. They observed that these issues would need congressional
sponsorship to get attention. They argued that even without a coordinating
forum, states had some influence on federal policies in the 1990s in the
areas of welfare reform, the tobacco settlement, transportation, and
unfunded mandates reform.

Despite their concerns about prospects for support, participants for the
most part agreed that a new intergovernmental focal point is needed.
Participants observed that the format of such a forum, as well as ways to
generate interest among policy makers, should be the focus of future
discussions among leaders at all levels of government.

In addition, there was unanimous agreement that homeland security is a
great opportunity to start this kind of a dialogue across levels of
government. They observed that policy makers appear to be serious about
the need to enhance federal, state, and local operations to improve
homeland security. Homeland security provides an excellent example of
where effective coordination among all levels of government is literally a
matter of life or death. Because the nation relies on local governments as
the first line of defense, the challenge is to construct financial and
administrative relationships to promote improved local protection
initiatives consistent with national goals and threats. It was noted that
achievements made on this front could spill over into other policy areas.




Page 30                                                        GAO-03-365SP
Appendix III

Summary of Introductory Remarks                                                            Appendx
                                                                                                 iI




               Comptroller General David M. Walker opened the symposium and spoke
               about challenges facing all levels of government and the private sector. Mr.
               Walker began by outlining several long-term trends that will create shared
               challenges for all levels of government. Examples of these trends, which
               are laid out in GAO’s strategic plan framework, include the aging of the
               population, new and diffuse security threats, and globalization.
               Furthermore, Mr. Walker provided an overview of fiscal trends from the
               federal perspective and described the changing composition of federal
               spending over the past 40 years, noting the growth of mandatory social
               security and health programs as a share of federal spending. Looking
               ahead, he noted that projected increases in mandatory spending for Social
               Security, Medicare, Medicaid, and Net Interest will prompt unsustainable
               federal deficits, absent reforms to the spending or revenue sides of the
               budget.

               Since many of these fiscal challenges are shared by states in our system,
               initiatives to address these future pressures need to be pursued in an
               integrated and collaborative fashion. Whether it be health care reform or
               homeland security, our future policy decisions should be framed as
               national, rather than strictly federal, responses to problems and issues. Mr.
               Walker observed that such a collaborative approach can be informed by a
               series of key national indicators designed to measure the nation’s overall
               position and progress and the role of various governmental actors involved
               in key policy areas. He concluded that partnerships between levels of
               government are needed to address the common problems we all share, and
               all tools of government should be considered in implementing these
               partnerships.

               David Broder, a columnist for the Washington Post and keen observer of
               the nation’s political scene, began his comments by noting a striking
               disjunction between dialogue on federal fiscal issues and the dialogue on
               state fiscal issues. Both issues seem to be treated as separate and distinct
               in the press and among political leaders whereas, in his view, the issues are
               closely intertwined. He said that while federal decision makers enjoy the
               privilege of enacting new benefits and programs for their constituents,
               state and local decision makers are left with the hard choices of raising
               taxes or reducing spending to implement them. Compounding these
               pressures, revenue systems at the state and local level are constrained—
               the sales tax is being eroded by the Internet and the service-based
               economy, while raising income taxes is not politically palatable. Moreover,
               while state and local decision makers are faced with some hard choices to
               solve their fiscal crises, he claimed that many recent federal fiscal



               Page 31                                                          GAO-03-365SP
Appendix III
Summary of Introductory Remarks




decisions may have done more to worsen states’ fiscal conditions than to
provide any fiscal relief.

Mr. Broder said he is sure that states and cities will need federal help to get
through their current fiscal crises but wondered if they have enough
leverage in Washington to get the federal support they will need. Many
representatives of state and local interest groups have told him it is more
difficult than it has been in many years to get the attention of the Congress
or the administration on issues vital to state and local interests. Mr. Broder
lamented the absence of an institutional forum in which overall (federal,
state, and local) resources could be measured against national priorities.
Mr. Broder called for new partnerships to address the fiscal
interrelationship among the levels of government and the need to work
together to address the key challenges facing the nation.




Page 32                                                            GAO-03-365SP
Appendix IV

Intergovernmental Relations Symposium Slide
Presentation                                                   Appendx
                                                                     iIV




                 GAO
          INTERGOVERNMENTAL
          RELATIONS SYMPOSIUM
    Addressing Key Challenges in an Intergovernmental
                         Setting

                          November 20, 2002




                    Page 33                         GAO-03-365SP
                            Appendix IV
                            Intergovernmental Relations Symposium
                            Slide Presentation




                    SERVING THE CONGRESS
                GAO’S STRATEGIC PLAN FRAMEWORK
                                          MISSION
            GAO exists to support the Congress in meeting its constitutional
    responsibilities and to help improve the performance and ensure the accountability
            of the federal government for the benefit of the American people.

THEMES                                         GOALS       &     OBJECTIVES

                     Provide Timely, Quality Service to the Congress and the
   Security          Federal Government to . . .
     and
Preparedness             Address Current and Emerging Challenges to the Well-Being and
                         Financial Security of the American People related to . . .

                         
                          Health care needs and financing          
                                                                    Effective system of justice
Globalization
                         
                          Education and protection of children     
                                                                    Viable communities
                         
                          Work opportunities and worker            
                                                                    Natural resources use and
                          protection                                environmental protection
                         
                          Retirement income security               
                                                                    Physical infrastructure
  Changing
  Economy
                         Respond to Changing Security Threats and the Challenges of
                         Global Interdependence involving . . .
Demographics                                                     
                          Diffuse security threats                  Advancement of U.S. interests
                         
                          Military capabilities and readiness      
                                                                    Global market forces

                      Help Transform the Federal Government
                                                 Government’s
                                                            s Role and How It
   Science
     and              Does Business to Meet 21st Century Challenges by assessing                  ...
 Technology
                         
                          Roles in achieving federal               
                                                                    Progress toward results-oriented,
                          objectives                                accountable, and relevant government
                         
                          Human capital and other capacity for     
                                                                    Fiscal position and financing of the
   Quality                serving the public                        government
     of
    Life              Maximize the Value of GAO by Being a Model Federal Agency and
                      a World-Class Professional Services Organization in the areas of . . .

 Governance              
                          Client and customer service              
                                                                    Process improvement
                         
                          Leadership and management focus          
                                                                    Employer of choice
                         
                          Institutional knowledge and experience

                                      CORE VALUES
Accountability                                Integrity                                     Reliability
                                                                                            Fiscal 2002-2007




                            Page 34                                                                            GAO-03-365SP
                                                                Appendix IV
                                                                Intergovernmental Relations Symposium
                                                                Slide Presentation




                        Composition of Federal Spending
                             By Budget Function
                         1962                                                          1982                     2002



                                                                                                                       17%
                                                                                                 25%
          31%                                                              34%                           32%
                                          50%
                                                                                                                         23%
                                                                                                  21%
       6%
                                                                           11%                           9%
                   13%                                                                                          19%
                                                                                            9%

                Defense                                                 Net interest                    Medicare & Medicaid
                                                                         Social Security                All other spending
Source: Budget of the United States Government, FY 2004, Office of Management and Budget.




                                                                Page 35                                                      GAO-03-365SP
                                       Appendix IV
                                       Intergovernmental Relations Symposium
                                       Slide Presentation




 Composition of Spending as a Share of GDP
Assuming Discretionary Spending Grows with GDP
        and the Tax Cuts Do Not Sunset
40 Percent of GDP


30
                      Revenue

20


10


0
                2000                             2015            2030                 2050
                                                     Fiscal year

                     Net Interest                               Medicare & Medicaid
                     Social Security                            All other spending
 Source: GAO’s January 2003 Analysis




                                       Page 36                                               GAO-03-365SP
                                        Appendix IV
                                        Intergovernmental Relations Symposium
                                        Slide Presentation




 Composition of Spending as a Share of GDP
Assuming Discretionary Spending Grows with GDP
after 2003, the 2001 Tax Cuts Do Not Sunset, and
    Social Security Benefits Payable after 2041
 40       Percent of GDP


 30                           Revenue


 20


 10


  0
                     2000                    2015                     2030           2050
                                                       Fiscal year

                       Net Interest                            Medicare & Medicaid
                       Social Security                         All other spending
 Source: GAO’s January 2003 Analysis




                                        Page 37                                             GAO-03-365SP
                                                             Appendix IV
                                                             Intergovernmental Relations Symposium
                                                             Slide Presentation




                            Federal and State Revenue Trends
   15
              Real year-over-year quarterly percent change
   10

     5

     0
                                State tax revenue
    -5
                                Federal revenue

 -10

 -15
       1996Q1                    1997Q1                    1998Q1                    1999Q1                    2000Q1                   2001Q1   2002Q1
Source: State tax revenue from Rockefeller Institute/NASBO. Federal revenue from Bureau of Economic Analysis, Department of Commerce.




                                                             Page 38                                                                              GAO-03-365SP
                                                                Appendix IV
                                                                Intergovernmental Relations Symposium
                                                                Slide Presentation




                                State Medicaid Spending
                          as a Percent of Total State Spending
 22           Percent of total state spending

 21

 20

 19

 18

 17

 16
  1992                 1993             1994              1995        1996       1997        1998       1999   2000   2001      2002
Source: National Association of State Budget Officers (NASBO)




                                                                Page 39                                                      GAO-03-365SP
                                                                  Appendix IV
                                                                  Intergovernmental Relations Symposium
                                                                  Slide Presentation




                                         State Spending by Function
                                     as a Percent of Total State Spending,
                                           After 1, 5, and 10 Years
             After 1 year                                                                                             After 5 years
                                          Elementary &
                                                                                                                                                Elementary &
                                           Secondary
                                           Education
                                                                                                                      Medicaid                   Secondary
                                             21.8%                                                                     26%                       Education
            Medicaid                                                                                                                               20.6%
             20.8%
                                                                                                                                                    Higher Education
                                                         Higher Education
                                                                                                                                                          10.5%
                                                              11.2%
                                                                                                                                                  Public Assistance
                                                         Public Assistance                                                                               2.0%
                                                                                                          All Other                           Corrections
                                                               2.2%                                        29.2%
                                                                                                                                 Transportation 3.4%
                                               Corrections                                                                           8.1%
 All Other
                                                 3.7%                           After 10 years
  31.6%                          Transportation
                                     8.8%
                                                                                   Medicaid                 Elementary &
                                                                                    33.6%                    Secondary
                                                                                                             Education
                                                                                                               18.3%

                                                                                                              Higher Education
                                                                                                                   9.4%
                                                                All Other
                                                                                                         Public Assistance
                                                                 26.5%
                                                                                                               1.8%
                                                                                                   Corrections
                                                                                    Transportation   3.1%
                                                                                        7.3%

Note: Assuming Current Growth Rate for Medicaid and Current Average Growth for All Other Categories.

Source: National Association of State Budget Officers.




                                                                  Page 40                                                                                  GAO-03-365SP
                                                              Appendix IV
                                                              Intergovernmental Relations Symposium
                                                              Slide Presentation




      Total Outlays for Grants to State and Local Governments
                      (Fiscal Years 1962-2002)
350              Billions of FY1996 dollars

300

250

200

150

100

   50

      0
      1962                             1970                                    1980                   1990          2002
           Grants for Payments for Individuals                                              Other Grants     Total Grants
Source: Budget of the United States Government, FY2004, Office of Management and Budget.




                                                              Page 41                                               GAO-03-365SP
                                                                  Appendix IV
                                                                  Intergovernmental Relations Symposium
                                                                  Slide Presentation




Number of Federal Preemption Statutes Enacted per Decade
 130 Number
 120                                                                                                                                                                                       1999
                  Civil Rights and other                                                                                                                                                   est.*
 110
 100              Health, safety, and environment

  90              Commerce and transportation
  80              Banking, finance, and taxation
  70
  60
  50
  40
  30
  20
  10
    0
        Before             1900-            1910-             1920-              1930-            1940-            1950-              1960-            1970-             1980-             1990-
         1900              1909             1919              1929               1939             1949             1959               1969             1979              1989              1999
        Year

*The 1990-1991 rate was multiplied by 5 to estimate how many preemptions might be enacted during 1990-1999.

Source: U.S. Advisory Commission on Intergovernmental Relations,Federal Statutory Preemption of State and Local Authority: History, Inventory, and Issues (Washington, D.C., 1992), p.7.




                                                                  Page 42                                                                                                          GAO-03-365SP
                            Appendix IV
                            Intergovernmental Relations Symposium
                            Slide Presentation




                Policy Tools and Actors
                                rei Lo es
                                    ec rs


                                      Go ls
                             Fo s & nci
                                   g n ca
                                  Ex to
                                 ate ge


                        No SE v't
               Ac
                               St . A




                 Fa ac ts
                                    s


                Fo -Ba rs
                        ntr ofi
                    ith to
                      r of d
                                G
                    Co Pr


                  r P se
                              -



                          its
                            n
                         Tool                                                         e nt
                              s                                               g  e  m
                      Direct                                            a n a
                             S                                      M                    n i ng
                       Grant ervices                                           i c P   n
                                                                                     la mt
                     Contr s-in-Aid                                     a t e g ce Mg
                                                                      r
                                                                    St rman pital
                    Credit acting Ou                                     o
                    Tax E & Insuranc
                                     t                              Perf man Cang
                          xpend        e                              Hu dgeti mt
                                 i
                        User F urest                                      Bu ial Mg
                       Regul ees                                              nc
                             ations                                   FinaT Mgmt s
                                                                             I ition
                                                                            c q uis
                                                                         A
Source: GAO.




                            Page 43                                                           GAO-03-365SP
Appendix V

Grant Programs to State and Local
Governments                                                                                                                             Append
                                                                                                                                             x
                                                                                                                                             iV




               Figure 5: Summary of the Number of Grant Programs to State and Local
               Governments: Fiscal Year 2001
                                                                                           Number of       Obligations
                                         Department or Agency                              programs        in millions)
                Agriculture                                                                       63          $20,141
                Commerce                                                                          38               986
                Defense                                                                            4                66
                Education                                                                        119           31,928
                Energy                                                                             5               217
                Health and Human Services                                                        158          191,028
                Housing and Urban Development                                                     33           27,443
                Interior                                                                          62             2,582
                Justice                                                                           55             4,060
                Labor                                                                             20             7,559
                Transportation                                                                    24            40,571
                Treasury                                                                           1                13
                Veterans Affairs                                                                   6               483
                Environmental Protection Agency                                                   44             3,395
                Social Security Administration                                                     1                23
                Appalachian Regional Commission                                                    5               102
                Corporation for National and Community Service                                     6               324
                Equal Employment Opportunity Commission                                            1                30
                Federal Emergency Management Agency                                               11               331
                Denali Commission                                                                  1                24
                National Foundation on the Arts and the Humanities                                 8               259
                         Total                                                                   665         $331,565

                Source: OMB analysis of data from December Update to the 2001 Catalog of Federal Domestic Assistance (December 2001).




               Note: Excludes grants with no reported obligations.




               Page 44                                                                                                  GAO-03-365SP
Appendix V
Grant Programs to State and Local
Governments




Figure 6: The 20 Largest Grant Programs to State and Local Governments: Fiscal
Year 2001 (obligations in billions)

                                                                                 FY 2001               Percent
                   Agency/Program                                                Obligations            of total
 1. HHS: Medicaid                                                                    $130.2             39.3%
 2. Transportation: Highway Planning and Construction                                  30.7               9.2%
 3. HHS: Temporary Assistance for Needy Families                                       19.1               5.7%
 4. HUD: Section 8 Housing Choice Vouchers                                             11.4               3.4%
 5. Education: Title I Grants to Local Educational Agencies                              8.6              2.6%
 6. Agriculture: National School Lunch Program                                           6.5              2.0%
 7. Education: Special Education - Grants to States                                      6.3              1.9%
 8. HHS: Head Start                                                                      6.2              1.9%
 9. HHS: Foster Care - Title IV-E                                                        5.1              1.5%
 10. HHS: State Children's Health Insurance Program                                      4.2              1.3%
 11. Agriculture: Special Supplemental Nutrition Program for Women,
        Infants, and Children (WIC)                                                      4.1              1.2%
 12. HUD: Public and Indian Housing                                                      3.3              1.0%
 13. HHS: Child Support Enforcement                                                      3.2              1.0%
 14. Transportation: Airport Improvement Grants                                          3.1              0.9%
 15. HUD: Community Development Block Grants/Entitlement Grants                          3.1              0.9%
 16. HUD: Public Housing Capital Fund                                                    3.0              0.9%
 17. Transportation: Federal Transit Formula Grants                                      2.9              0.9%
 18. Transportation: Federal Transit Capital Investment Grants                           2.8              0.8%
 19. HHS: Child Care Mandatory and Matching Funds of the Child Care
         and Development Fund                                                            2.6              0.8%
 20. Labor: Unemployment Insurance Grants for State Administration                       2.3              0.7%
          Subtotal, 20 largest programs                                                258.7             78.0%

   Remaining 645 programs:
     Programs of more than $50 million but not in the top 20
          (190 programs)                                                                66.7             20.1%
     Programs of $50 million or less (455 programs)                                      6.1              1.8%
       Subtotal, remaining 645 programs                                                 72.8             22.0%

     Total, 665 programs                                                             $331.6            100.0%
 Source: OMB analysis of data from December Update to the 2001 Catalog of Federal Domestic Assistance (December 2001).


Note: HHS indicates the Department of Health and Human Services. HUD indicates the Department of
Housing and Urban Development.




Page 45                                                                                                GAO-03-365SP
           Appendix V
           Grant Programs to State and Local
           Governments




           Figure 7: Trend in the Number of Federal Grant Programs to State and Local
           Governments 1980-2001
                                                   Number
                                                      of
                                                   funded
            Fiscal year                           programs
            1980                                     434
            1981                                     367
            1982                                     303
            1983                                     320
            1984                                     330

            1985                                    335
            1986                                    349
            1987                                    381
            1988                                    415
            1989                                    434

            1990                                    463
            1991                                    513
            1992                                    539
            1993                                    573
            1994                                    593

            1995                                    608
            1996                                    570
            1997                                    583
            1998                                    591
            1999                                    630

            2000                                    653
            2001                                    665

            Source: OMB analysis.




(450179)   Page 46                                                             GAO-03-365SP
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