FEDERAL-STATE- LOCAL RELATIONS Trends of the Past Decade and Emerging Issues E #llll~lll~l~ 140941 United States GIL!+!0 General Accounting Office Washington, D.C. 20648 Human Resources Division B-236693 March 22,199O The Honorable James Sasser Chairman, Subcommittee on General Services, Federalism and the District of Columbia Committee on Governmental Affairs United States Senate The Honorable Ted Weiss Chairman, Subcommittee on Human Resources and Intergovernmental Relations Committee on Government Operations House of Representatives This report provides information to the Congress on the key changes in the federal government’s relationship with states and localities over the past decade. It also identifies emerging issues concerning these intergovernmental partnerships, which may be useful for the Congress to consider as federal policymakers approach the next decade. Copies of this report are being sent to other congressional committees and subcommittees; the Director, Office of Management and Budget; the Chairman, U.S. Advisory Commission on Intergovernmental Relations; and other interested parties. This report was prepared under the direction of Linda G. Morra, Director, Intergovernmental and Management Issues, who may be reached on (202) 276-1655 if you or you staff have any questions. Other major contributors are listed in appendix III. Lawrence H. Thompson Assistant Comptroller General 1, EJxecutiveSummq I Federal-state-local relations have changed significantly over the past P$rpose decade. Events and trends causing these changes have had both positive and negative effects on the capacity of state and local governments to carry out their responsibilities across a range of domestic programs and policies. This report discusses how changed federalism policies and fed- eral budgetary retrenchment have worked to broaden the role of the states in the intergovernmental system, while federal regulatory trends have lessened state discretion but not state responsibilities. The report then links these factors to three emerging issues that the Congress should be aware of as it seeks to address the budget deficit and pursue other national priorities. I Apart from a few programs, such as the administration of the social Bqckground security system, the federal government is not a direct provider of domestic public services. Instead, the majority of national domestic pro- grams are implemented through a complex partnership among federal, state, and local governments. Traditionally, grants-in-aid have formed the principal means of tying the intergovernmental system together. However, while federal grants-in-aid to states and localities totaled $95 billion in fiscal year 1989, they peaked in real terms in 1978. As a share of total state-local expenditures, federal aid shrank by one-third over the 197848 period. This decline contributed to a search for new ways to meet continuing demands for public services by many of the more than 83,000 units of government comprising the intergovernmental system and by the federal government itself. During the past decade, changing federalism policies and federal budget- Results in Brief ary retrenchment resulted in an increase in the role of the states in the intergovernmental system. Subsidies to local governments were reduced and state authority over some kinds of federal aid was increased. States became more prominent over the decade as a result, but not without some adverse effects. The first emerging issue identified by GAO is that the fiscal gap between wealthier and poorer communities became larger over this period. In contrast, trends in federal regulation lessened state discretion but not state responsibility. Despite certain Reagan administration efforts to minimize it, federal regulation of states and localities grew over the past decade. New regulations governing domestic programs were created, and federal preemption powers were expanded. This situation was cited by state and local officials whom GAO interviewed as the most negative Page2 GAO/HRD9034FederalState-LocalRelations Executive Summary trend of the past decade. It raises the second emerging issue GAO identi- fied: while regulation is an important mechanism for the federal govern- ment to use to attain statutory objectives, its success often depends on the goodwill and cooperation of state and local governments to imple- ment these federal regulatory programs. Yet, in this respect, tensions between the federal and state and local governments are mounting. States have increased their prominence over the past decade and now stand at the threshold of the 1990s as highly visible leaders in a broad range of domestic policies. In part, this is due to the increased institu- tional and administrative capacity of states. Federal budgetary retrenchment has also thrust states into new and expanded roles. Sus- tained national economic growth has also contributed. The third emerging issue that GAO identified, however, is that the combi- nation of federal budgetary retrenchment and expanding regulation could place too much fiscal pressure and program responsibility on states, especially during periods when national or regional economies are weak. This, in turn, could slow-or even reverse-the trends in state prominence. Principal Findings Decentralization Driven by Changing federalism policies, tax cuts, and efforts to reduce the size of Changing Federalism the budget deficit have helped to decentralize the intergovernmental system and increase the role of the states. In particular, federal aid for Policies and Growing community and economic development, housing, and public infrastruc- Fedyral Deficit ture has been cut significantly, while program funding benefiting poor people has been largely maintained, and in some cases expanded. Because local governments have been the primary recipients of the for- mer categories of aid, federal-local relationships, which developed in the 1960s and 1970s were reduced (see pp. 15-19). Increased Concerns About Beginning in the 1970s budgetary pressures led federal policymakers to Intergovernmental further national objectives through nongrant strategies, notably: Regulation regulatory requirements, in which the federal government calls on Y l states and localities to administer federal rules; Page 3 GAO/HRD9O34 FederalState-Local Relations Executive Summary ,. ’ . preemptions, in which state or local policies are preempted by national action; and . direct orders, in which the national government directly orders state and local governments to take specified actions (see pp. 26-27). Regulation is one of a number of fundamental powers the federal gov- ernment has to attain statutory objectives. Even so, over the past dec- ade, national regulatory trends lessened state discretion without reducing the scope of state responsibilities. Notwithstanding some Rea- gan administration efforts to reduce overall levels of intergovernmental regulation, the Congress, federal agencies, the courts, and the adminis- tration continued to use all three forms of regulation to expand and strengthen federal regulatory efforts (see pp. 27-31). / I St&e Government Was States as a whole became more capable of responding to public service Stiengthened demands and initiating innovations during the past decade. Many fac- tors account for strengthened state government. Beginning in the 1960s and 197Os, states modernized their governmental structures, hired more highly trained individuals, improved their financial management prac- tices, and diversified their revenue systems (see pp. 33-37). Also con- tributing was the Reagan administration’s philosophy of focusing program responsibility on states, thrusting these governments into new or increased leadership responsibilities (see pp. 40-41). Finally, since 1983, sustained national economic growth has provided many state and local governments greater financial stability. This, in turn, has given them more flexibility to plan for the future and address existing prob- lems (see pp. 41-42). Implications for Federal The events and trends of the past decade have created a paradox in Po)icymakers intergovernmental relations with important implications for federal policymakers. Federal budgetary realities and changing federalism poli- cies helped to cast states in a more prominent role in domestic policy in the 1980s than in the 1970s. At the same time, regulatory instruments provided alternative means to achieve national objectives when budget- ary strategies proved untenable. In combination, these changes suggest that, overall, state fiscal health and institutional capacity to carry out domestic responsibilities may become more entwined with the actions of the federal government in the 1990s than was true in the 1970s. Page 4 GAO/HRD-90-34FederalStateLocal Relations Jkecutive Summary Based on these past events and trends, GAO identified three broad issues that the Congress should be aware of in the coming decade: l First, the federal government depends heavily on the institutional and financial capacity of state and local governments to administer its pro- grams. Yet over the past decade, federal budget cuts helped to widen the fiscal gap between wealthier and poorer communities. This, in turn, is one warning sign that inequities in the levels of basic state and local public services (e.g., police, primary and secondary eduction, and infra- structure) may be increasing. l Second, while regulation of states and localities is an important tool for the federal government to attain its statutory objectives, tensions among levels of government have mounted over the past decade as regulatory requirements, preemptions, and mandates increased (see pp. 48-49). The cumulative effect of these increases-coupled with decreasing federal aid-could force state and local governments to choose between meeting their service responsibilities and fulfilling national regulatory objec- tives. This kind of divergence between state, local, and national priori- ties is likely to reduce the effectiveness of these governments as agents of national regulatory policies and public service providers, especially during periods of economic decline. l Third, by the end of the 1980s states had reemerged as principal domes- tic partners with the federal government and policy leaders and pro- gram innovators in their own right. However, because states occupy an increasingly central place in the intergovernmental system, the combina- tion of federal fiscal and regulatory trends poses a special threat to their leadership because it might slow- or even reverse-recent progress (see pp. 49-50). GAO is making no recommendations. Recommendations The contents of this report were discussed with national and state inter- Agency Comments governmental experts and agency officials with responsibility for inter- governmental programs. Their comments are reflected throughout the report. Page 5 GAO/HRD-90-34Federal-State-LocalRelations Edecutive / Summary 2 Chapter 1 10 Introduction Background 10 12 Objectives, Scope, and Methodology Ctiapter 2 14 F&era1 Budgetary Deficit Reduction Strategies Drove Retrenchment Federal Aid Cuts Fell Most Heavily at the Local Level 15 16 R ‘trenchment Two Key Tax Subsidies Were Cut 19 In1 reased the State States Step In, Providing More Aid to Local Governments 23 Role in the Intergovernmental System Chapter 3 26 Trends in Federal Past Growth and New Forms of Intergovernmental Regulation 26 Regulation Lessened Reagan Administration Efforts to Decentralize and 27 State Discretion but Simplify Federal Regulation Not Responsibility Regulation Increased, Funding Was Cut 28 Chapter 4 32 Increased State State Agendas Are Broader and Programs More 32 Innovative Prominence in Improved State Capacities Contributed to State 33 Domestic Affairs: Prominence National Policy Directions Contributed to State 40 Progress and Prominence Prospects National and State Economic Recovery Contributed to 42 State Prominence Page 6 GAO/HID-go-34 FederalState-Local Relations Contents Chapter 5 44 Tretids of the Past Federal Budget Trends Exacerbated Growth in State and 45 Local Fiscal Disparities De&de Raise State and Local Officials and Intergovernmental Experts 48 rtant Issues for Believe Regulatory Trends Cause Problems Policymakers Federal Budget and Regulatory Trends Could Adversely 49 Affect State Prominence Apppdixes Appendix I: Key Intergovernmental Events: 1978-88 52 Appendix II: Persons Interviewed to Develop Issues in 58 This Report Appendix III: Major Contributors to This Report 61 Bibliography 62 Tables Table 1.1: State and Local Government Expenditures 10 (1987) Table 2.1: Percentage Decrease in Federal Aid as a Share 18 of Total Revenues, by Type of Government (1980-86) Table 2.2: Tax Expenditures Aiding State and Local 20 Governments (Fiscal Year 1988) Table 3.1: Administration and Oversight Budgets, 30 Selected Intergovernmental Regulatory Programs (Fiscal Years 1978-88) Table 3.2: Federal Preemption Statutes, by Date of 31 Enactment Table 4.1: Adoption of Major Taxes Since 1961 35 Figures Figure 1.1: Distribution of Federal Outlays and Forgone 11 Revenues for Intergovernmental Programs (Fiscal Year 1988) Figure 2.1: Federal Grants-in-Aid as a Percentage Share of 16 Total State-Local Spending (1978-88) Figure 2.2: Trends in Federal Aid to States and Localities 17 (1978-86) Figure 2.3: Changes in the Composition of Federal Aid to 19 States and Localities (1978-88) Figure 2.4: Federal Revenues Forgone Through Subsidies 21 Favoring State and Local Governments (Fiscal Years 1978-88) Page 7 GAO/HRD-99-34Federal&ate-Local Relations I Content9 Figure 2.5: Growth in State-Local Revenues, Excluding 24 Federal Aid (1978-87) Figure 4.1: State Personal Income Tax Revenues Per $100 36 of Personal Income (1978-87) Figure 4.2: State and Local Tax Revenue Per $100 of 38 Personal Income (1978-87) Figure 4.3: State Spending Per $100 of Personal Income, 39 Excluding Federal Aid (1978-87) Figure 4.4: State Income and General Sales Tax Revenues 42 (Fiscal Years 1978-86) Figure 4.5: State Year-End Fund Balances (1978-88) 43 Figure 5.1: Number of Counties Above or Below the 46 National Per Capita Mean Income in 1978 and 1987 Figure 6.2: Population of Counties, Classified by County 47 Per Capita Personal Income as a Percentage of U.S. Per Capita Income (1977-87) Abbreviations ACIR U.S. Advisory Commission on Intergovernmental Relations AFDC Aid to Families With Dependent Children CRS Congressional Research Service DEFRA Deficit Reduction Act of 1984 EPA Environmental Protection Agency ERTA Economic Recovery and Tax Act of 1981 FISA Fair Labor Standards Act GAO General Accounting Office GRH Gramm-Rudman-Hollings Act GRS General Revenue Sharing IDB industrial development bond NGA National Governors’ Association OBRA Omnibus Budget and Reconciliation Act of 1981 OMB Office of Management and Budget TEFRA Tax Equity and Fiscal Responsibility Act of 1982 TRA-84 Tax Reform Act of 1984 TRA-86 Tax Reform Act of 1986 USDA Department of Agriculture Page8 GAO/HRD-90-34FederalStateLocal Relations Page 9 GAO/HRD-90-34FederalState-Local Relations Chadter 1 Introduction / Nearly all public services in the United States are jointly financed and Background delivered through the 50 state, 39,000 general purpose, and 44,000 spe- cial purpose local governments. This approach to public service delivery reflects the fact that the United States is a federal system in which I responsibilities are both divided and shared among separate levels of government, each possessing a base of legal and fiscal authority. Historically, responsibilities were more divided than shared. The states and, through them, local governments were preeminent in domestic pol- icy. However, in the aftermath of the Great Depression the federal gov- ernment increased its domestic commitments, creating a host of new programs and helping to finance the delivery of many more public ser- vices at the state and local level. Beginning in the Great Society period of the 1960s and continuing into the 1970s the federal government again stepped up its efforts, adding substantially more local government grant programs to the existing mix of federal aid. Having examined these trends in detail, in 1981, the U.S. Advisory Commission on Inter- governmental Relations (ACIR) concluded that “. . . the federal role has become bigger, broader, and deeper- bigger within the federal system, both in the size of its intergovernmental outlays and in the number of grant programs, broader in its program and policy concerns, and the wide range of subnational [state and local] governments interacting directly with Washington; and deeper in its regulatory thrusts and pre- emption proclivities.“l States and localities spent $926.7 billion in 1987, as table 1.1. shows. Table 1.1: State and Local Government Expenditures (1987) Dollars in Billions ._.____-- Total Type of government ..---I___-__ Number expenditures State .-- 50 $455.7 General purpose local governments 38,933 281.8 Counties 3,042 103.0 Municipalities --____-.__ -__~ 19,200 164.1 Townships _--__ --.-.__- 16,691 147 Special purpose governments 44,253 189.2 School districts-. 14,721 138.3 .%ecial districts 29,532 50.9 Source: Bureau of the Census, Statistical Abstract of the United States, 1989, p. 266; and Governmental Finances, 1986-87, table 2. ‘1J.S.Advisory Commission on Intergovernmental Relations, The Federal Role in the Federal System: The Dynamics of Growth, A-86 (Washington, D.C.: U.S. Government Printing Office, June, 1981) p. 1. Page 10 GAO/HRD-90-34FederalState-Local Relations - Chapter 1 Introduction Federal financial assistance to states and localities takes the form of grants-in-aid, tax subsidies, loans, and loan guarantees, Federal grants-in-aid were about $115.3 billion in fiscal year 1988. In addition nongrant aid-in the form of tax subsidies, loans, and loan guaran- tees-amounted to nearly $50 billion (see fig. 1.1). Figure 1.1: Distribution of Federal Outlay and Forgone Revenues for lnterg ,”vernmental Programs (FiscalJYear 1988) Loans and Loan Guarantees ($0.7) I n4% Tax Expenditures ($42.5) Source: Office of Management and Budget, The United States Budget, Special Analysis G and H, Fiscal Year 1990. The federal role in financing programs and services provided by state and local governments is relatively small when compared with spending for these purposes, which is derived from revenues raised by state and local governments. Yet, federal aid is important because it often signifies strong federal interests (e.g., in health care) or because it is designed to encourage innovation or stimulate spending for particular kinds of ser- vices (e.g., in primary and secondary education). Until 1986, federal Page 11 GAO/HlUHO-34 Federal&ate-Local Relations Chapter 1 Introduction aid-in the form of general revenue sharing-also was designed to mod- erate differences in fiscal capacities between wealthier and poorer communities. Some Reagan administration efforts to simplify the intergovernmental system notwithstanding, the federal relationship with states and locali- ties has continued to grow in complexity over the past decade. The fed- eral government’s reach has been extended in ways not traditionally considered grant or grant-connected, including new actions in policy areas affected by tax subsidies, regulations, and preemptions. At the same time, the federal government has more explicitly recognized the state role in domestic policy development and administration and deem- phasized its connection with local governments. These changes occurred in part because changed federalism policies and constraints imposed by a large federal deficit increased pressure for cuts in federal aid to states and localities as part of an overall effort to reduce the deficit. Yet, because actions were not part of a single plan for reforming the inter- governmental system, their aggregate impact was not explicitly considered. Given the magnitude of change in the intergovernmental system over the past decade and the fact that the federal government depends pri- marily on state and local governments to achieve its domestic policy objectives, we sought to examine recent trends and changes in the rela- tionship between federal and state and local governments in order to identify the principal challenges these trends pose for achieving national policy goals and program objectives. Objectives, Scope,and over the 1978-88 period and to describe their consequences with respect M&hodology to issues federal policymakers are likely to face in the near future. To set the context for this analysis, we first identified nine major events affecting intergovernmental relations since 1978 (see app. I). We then analyzed key trends and identified emerging issues that the Congress should be aware of in the coming decade. The year 1978 was selected as the baseline for measuring changes in the intergovernmental system because in this year federal aid to states and localities peaked in real terms, and because it was a turning point in public attitudes toward taxation as reflected in the passage of Califor- nia’s property tax limitation proposition, Proposition 13 (see app. I). These two events signaled the beginning of a fundamental redirection in Page 12 GAO/HRD-SO-34 Federal&ate-Local Relations Chap&x 1 Introduction intergovernmental relations, which for the two preceding decades had emphasized growth in the size and range of federal-state and federal- local programmatic partnerships. This pattern of federal expansion was reversed in the 1980s by President Reagan’s policy of devolving pro- gram authority to the states as well as by the sustained fiscal pressures associated with the growing federal budget deficit. In part, our analysis is based on a series of interviews with expert observers of the intergovernmental system, both inside and outside the federal government. In addition, we interviewed selected state and local officials in Colorado, Florida, Massachusetts, North Carolina, and Texas (see app. II). We chose these states so as to balance geographic location and size as well as political party affiliations of governors and majorities in legislatures. Our analysis is also based on an extensive review of rele- vant research conducted over the past decade. Finally, we drew on our earlier work on block grants and other intergovernmental programs and our recent work on intergovernmental regulatory issues (see bibliogra- phy). Interviews were conducted between March and October 1988. Page 13 GAO/HRD-9034 FederalStateUcal Relations Chanter 2 Federal Budgetary RetrenchmentIncreasedthe State Role in the Intergovernmental System Federal budgetary retrenchment increased the role of states in the inter- governmental system by reducing subsidies to local governments and increasing state authority over some kinds of federal aid. Changing pri- orities, tax cuts, and mounting deficits drove federal policymakers to cut budget and tax subsidies to both states and localities. These cuts fell more heavily on localities, however, because the Congress placed sub- stantial importance on those “safety net” programs in health and wel- fare that help the poor, which generally are federal-state partnerships. In contrast, the Congress placed less importance on those “nonsafety” net programs in infrastructure and economic development, which gener- ally are federal-local in nature. The Congress also made cuts in two large federal tax subsidies affecting state and local governments: the deductions for state and local sales taxes paid by taxpayers who itemize on their federal income tax returns and the exclusion of taxpayers’ interest earnings on tax exempt bonds. The deductions for sales taxes were eliminated.’ And there were major changes in the area of tax exempt bonds, a primary source of capital for state and local infrastructure and community and economic develop- ment projects. In this respect, rules on federal tax treatment were tight- ened. Existing limits on the total dollar amount of private activity bonds that may be issued in a single year were lowered significantly.Z,3 And the power to allocate private-activity bond authority (within these federally imposed ceilings) was taken from local governments and given to states, increasing their authority over local public finance. During this period of federal budgetary retrenchment, states increased their aid to local governments by nearly 24 percent (in constant dollars), although this growth did not keep pace with the growth of revenues generated from local sources. Moreover, state aid to some kinds of local governments grew more than others. Thus, for example, while state aid ‘The benefit that states and localities received from this deduction had always been indirect, pre- sumed to flow from an increased willingness of citizens to pay higher sales taxes at state and local levels than they would in the absence of the federal deduction. However, because estimates of this benefit depend on economic assumptions, estimates of it vary. ‘In many, although not all, instances, private-activity bonds are used by state and local governments to provide capital for private sector enterprises and economic development projects. For federal tax purposes, tax exempt bonds are divided into three groups: (1) governmental tax exempt, (2) private activity tax exempt, and (3) private activity taxable. For a detailed discussion of the differences among these see Margaret T. Wrightson, “Intergovernmental Tax Immunity and the Constitutional Status of Federalism,” Publius: The Journal of Federalism 19 (Summer, 1989), p, 40. ‘IThe benefit of exclusions of interest earnings on tax exempt bonds to the state-local sector is the difference between the interest rate on taxable bonds, which these governments would pay in the absence of the exemption, and the interest they actually pay. Page 14 GAO/HRJJ90-34FederalState-Local Relations chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System to school districts rose as a share of school district revenues, counties and especially cities became more fiscally self-reliant. The 1981 tax cuts and indexation of income taxes to inflation did not Deficit Reduction cause federal revenues to decline over a 5-year period, but revenues Str+egies Drove grew more slowly in the 1980s than in the previous decade. In the Retrenchment absence of correspondingly large spending reductions, the slower growth in tax revenues and increased defense spending led to a dra- I matic growth in the budget deficit and ultimately to the adoption of the Gramm-Rudman-Hollings Act of 1985 (GRH) (see app. I). The intergovernmental impacts of federal deficits and changing national priorities were visible well before GRH, however. Even though federal aid in the form of grants to state and local governments totalled $95 billion in 1989, this kind of aid peaked in real terms in 1978. This was also the year California’s property tax limitation proposition, Proposition 13, was passed (see app. I). Thereafter, the Omnibus Budget Reconciliation Act of 1981 (OBRA) resulted in domestic spending cuts of $35 billion in fiscal year 1982. Grants to state and local governments fell $6 billion in nominal terms that year and 13 percent below anticipated or baseline expenditures. Altogether, OBRA eliminated 59 grant programs and con- solidated nearly 80 narrowly focused categorical grant programs into nine broad-based block grants. Significantly, many of the grants elimi- nated by OBRA had been federal-local, while all of the block grants cre- ated were state-administered (see app. I). After OBFtA'S passage, aggregate levels of federal grants-in-aid continued to decline, but more slowly. Overall, during the 1978-88 period, federal aid to state and local governments decreased by $17.2 billion in constant dollars. As a share of state-local expenditures, federal aid shrank by about one-third, from 27 to 18 percent, as shown in figure 2.1. Page 15 GAO/HRD-90-34FederalStateLocal Relations Chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System Figure 2.1: Federal Qrantr-in-Aid as a Percentage Share of Total State-Local Spending (1978-88) 35 Porcantagr L L 1078 1979 1980 1965 1986 1987 1988 FImcalYoar Source: ACIR, Significant Features of Fiscal Federalism, 1989 Edition, vol. I, p, 21 Although total federal aid to states and local governments declined, the Federal Aid Cuts Fell decline affected states and localities differently. Total aid fell at an Most Heavily at the annual rate of 1.6 percent between 1978 and 1986 in constant dollars. Local Level However, it grew at a 1.3-percent rate for states, while decreasing at a 5.5percent rate for local governments over the same period. In effect, states were enjoying a larger share of a smaller pie, as is shown in figure 2.2. Page 16 GAO/HRD-90-34FederalState-Local Relations ’ / Chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System St&$ and Localities (1978-66) (Consfant 1982 Dollars) 100 Dollar8 In Bllllona 00 80 70 60 so 40 30 20 10 I 0 I 1 1 states Localities Source: ACIR, Significant Features of Fiscal Federalism, 1988 Edition, vol. II, p. 81. There also were relative differences among local governmental fiscal “losers.” As a Congressional Research Service (CRS) analysis found, counties were among the hardest hit, experiencing a 73-percent decrease in direct federal aid as a percentage of total revenues between 1980 and 1986 (see table 2.1). The same analysis also puts growth in state aid in clearer perspective. Moreover, while federal assistance to states increased in absolute terms between 1980 and 1986, this aid did not keep pace with state revenue raising efforts over the same period. Thus, even among the “winners,” federal assistance declined by 11 percent when expressed as a proportion of total revenue, as table 2.1. shows. Page 17 GAO/HRD-90-34FederalState-Local Relations / . Chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System Table 12.1:Percentage Decrease in Federal Aid as a Share of Total Federal aid as a Revenues, by Type of Qovernment percentage share of total ( 1960-86) revenues Percentage Type of government 1980 1988 change State 26.5 23.6 -11 Special districts 20.8 15.0 -28 School districts 8.9 6.1 -31 Cities 14.3 6.2 -57 Townships 7.4 2.1 -72 Counties 9.1 2.5 -73 Note: General Revenue Sharing program funding was netted out from the fiscal year 1985-86, to reflect its elimination in fiscal year 1987. Source: Lillian Rymarowicz and Dennis Zimmerman, Federal Budget and Tax Policy and the State-Local Sector: Retrenchment in the 1980s (Congressional Research Service Report, 88-600 t, September 9, 1988.) Types of Programs Expenditures for entitlement programs such as Medicaid, which are typ- Receiving Federal A id ically administered by states, increased over the 1978-88 period, while aid for economic development, housing, and other nonsafety net pro- Have Changed grams, which almost exclusively goes to local governments, declined. Furthermore, states assumed greater responsibilities and increased pro- gram discretion in the areas of health and welfare under newly enacted block grants (see app. I). While total 1982 program funding was cut by 15 percent below the 1981 categorical grant level under the block grants, states experienced a net increase in funds overall because many of the programs eliminated had been federal-local. These same trends can be seen in another way. Federal aid for govern- mentally administered programs designed to meet the needs of individuals increased, while aid directed to governments to meet com- munity-wide or public service needs declined. For example, Medicaid has increased every year since fiscal year 1978, a trend projected to con- tinue. On the other hand, those forms of aid to governments that gener- ally support capital improvements or public services were cut, resulting in the contrasting trendlines depicted in figure 2.3. Page 18 GAO/HRlMO-34 Federal&ate-Local Relations Chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System Flgura 2.3: Changes in the Composition of Feqeral Aid to States and Localities 80 Dollar8 In Bllllona (1978.TO) (Constant 1982 Dollars) 10 1978 1979 1980 1951 1962 1953 1934 1985 1955 1987 1983 FlScal Y8W - Payments for Individuals - - - - Capital Investment m Remainder Source: Office of Management and Budget, Historical Tables, Budget of the United States Government (fiscal year 1990), p. 240. An indirect form of federal assistance to states and localities is tax sub- Two Key Tax sidies, whereby the federal government forgoes collecting revenues it Subsidies Were Cut would otherwise receive from corporations and individuals.4 The total of these subsidies increased during the 1978-88 period, but two large tax subsidies-the deductions for state and local taxes and the interest exemption for tax exempt bonds-were cut back. These changes reduced the rate of growth in state and local tax subsidies beginning in 1988. However, because these changes are recent their impacts are not yet entirely clear. 4Tax subsidies (many of which are reported in the Office of Management and Budget estimates of tax expenditures) are losses to the treasury resulting from provisions in the federal income tax code that give preferential treatment to individuals, corporations, and non-profit entities. Common preferences include differential rates for taxing different forms of income as well as deductions, credits, exclu- sions, and exemptions for some kinds of business and personal expenses. Page 19 GAO/HRD-90-34Federal-State-LocalRelations Chapter 2 Federal Budgetary Retrenchment Increased the State Rule in the intergovernmental System Pas/tGrowth of Tax Tax subsidies aiding states and localities are generally of two kinds: Subsidies exclusions of interest (almost entirely comprised of tax exempt bond interest) and deductions for taxes paid by individuals and corporations to state or local governments (see table Z.Z).” Table’ 2.2: lax Expenditures Aiding State and IIlocal Governments (Fiscal Year 1988) (Dollars in Billions) Description Value Exclusion of interest on: Industrial development bonds (IDB) for certain energy facilities 0.3 Pollution control/waste disposal facilities 1.6 Small issue IDBs 2.7 Mortgage bonds for owner-occupied housing 1.8 Debt for rental housing 1.2 Bonds -- for mass commuting vehicles 0.01 Bonds for airports, docks, etc. 0.7 Bonds for student loans ~-- 0.4 Debt for private, nonprofit education facilities -~ 0.3 Debt for private, nonprofit health facilities 2.2 f%bt for veterans housing 0.3 Debt for state/local public purpose bonds 10.4a Deductibility of: Nonbusiness state and local taxes other than owner-occupied housing 17.3 Property taxes for owner-occupied housing 10.1 aThe estimate of total tax expenditures reflects interactive effects among the individual items. There- fore, the individual items cannot be added to obtain a total. Source: Office of Management and Budget, United States Budget, Special Analysis G, Fiscal Year 1990. Tax subsidies aiding state and local governments grew rapidly over the 1978-86 period, as is shown in figure 2.4. “On these points see Lillian Rymarowlcz and Dennis Zimmerman, The Effect of Federal Tax and Budget Policies in the 1980s on the State-Local Sector (Congressional Research Service Report 86-2 E, January 2, 1986); Daphne A. Kenyon, “Implicit Aid to State and Local Governments Through Federal Tax Deductibility”; and Dennis Zimmerman, “The Intergovernmental Struggle Over Tax-Exempt Bond Reform” in State and Local Finance in an Era of New Federalism (Greenwich, CN, 1988), pp. 63-101. Page 20 GAO/HRD-90-34FederalState-Local Relations chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System A Federal Revenue8 Forgone Through Subsidies Favoring State and Local Governments 197&88)(Dollars in Billions) lam In Billlone I 1979 1979 1990 1991 1922 1982 1994 1965 1999 1997 1988 Flocd YOM Source: Special Analysis G of the Budget of the United States, 1978-88editions SalebTax Deductions A large share of the recent and projected decline in tax subsidies can be Eliminated, Tax Exempt attributed to the elimination of deductions for state and local sales taxes and restrictions on tax exempt bonds contained in the Tax Reform Act Bonds Restricted of 1986 (TRA-86) (see app. I). The loss of the deduction for state sales taxes constituted the largest of cuts in tax subsidies. Because its impacts on state taxing and spending abilities are indirect, however, its consequences are difficult to deter- mine. On the other hand, with respect to the increased role of the states, the changes in tax exempt bonds are significant for two reasons. First, much of the federal revenue loss associated with tax exempt bond growth can be traced to the vigorous use of these bonds for purposes other than traditional local and state infrastructure projects. Second, states were given greater authority to control the issuance of private- activity bonds within the limits of a single federally imposed volume cap. Page 21 GAO/HRD-90-34FederalState-LocaJRelations Chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovernmental System By the late 1970s and early 1980s tax exempt bonds were being used to fund many more kinds of activities than they were traditionally used for (e.g., public schools or road construction). They were being issued for a variety of loosely defined public-private partnerships, including some for business development and for construction of pollution-control, trade-show, convention, and sports facilities. Private-activity bonds also were issued to subsidize consumer borrowing, especially for low-cost college tuition loans and below-market-rate home mortgages primarily for first-time homebuyers. As uses multiplied and volume expanded, private-activity bonds came to be regarded by federal policymakers with increased skepticism. The Congress began to restrict the use of tax exempt bonds, but with mixed success. The Revenue and Expenditure Control Act of 1968 defined industrial development bonds (IDBS) and specified the circumstances under which such bonds were to receive preferential federal tax treat- ment. Later, the Mortgage Subsidy Bond Tax Act of 1980, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), and the Tax Reform Act of 1984 (TRA-84) commonly considered as part of the Deficit Reduction Act of 1984 (DEFRA) eliminated a number of abuses (e.g., use of proceeds from small issue IDB'S to finance race tracks, variety stores, and fast food restaurants) in the area of private sector investment and consumer borrowing.)6 However, these limitations proved not to be very effective, and bond volume continued to grow as figure 2.4 shows. The passage of ~~-86, most noted for lowering marginal income tax rates, reversed this trend in dramatic fashion. Altogether, the act’s intergovernmental impacts were considerably greater than those of other recent tax legislation, notably TEFRA and TM-84. In addition to new provisions affecting the use of bond proceeds,7 ~~-86 provided a single state volume cap set at $50 per capita or $150 million per annum in On these and other examples of congressional action to curb abuse see Dennis Zimmerman, “The Intergovernmental Struggle Over Tax Exempt Bond Reform,” in Michael E. Bell, State and Local Finance in an Era of New Federalism, (Greenwich, CN: JAI Press, 19SS),pp. 101-124. 7These included, for example, provisions restricting the use of bonds to encourage business invest- ment, bonds for some kinds of public transportation projects, and the use of bonds in advanced refunding and arbitrage practices (see app. I). Page 22 GAO/HRD-90-34Federal&ate-Local Relations Chapter 2 Federal Budgetary Retrenchment Increased the State Rule in the Intergovemmental System 1988. With limited exceptions, this cap applies to all types of private- activity bonds.s I As the federal government became a less dependable source of local gov- States Step In, ernment financial assistance, expectations about the role of the states in Prcviding More Aid to d omestic policy shifted. The fact that states moved to replace some lost Local Governments federal grant funds to local governments contributed to a widespread sense among observers of the intergovernmental system that states were “on the move.” In fact, state aid to cities increased 2.5 percent in real terms between 1978 and 1986. State aid to counties increased 15.5 per- cent over this same period. Notwithstanding this increase, however, state aid did not keep pace with local revenue raising. During this same 7-year period, general reve- nues derived from local sources increased 37 percent for cities and 52 percent for counties. On average, cities received about 36 cents from state government for every dollar raised in 1979. But, by 1986, this fig- ure was only 29 cents. In 1979, counties received 69 cents, but by 1986 they received less than 51 cents. An important exception to this trend was school districts. In 1978, they counted on the state for 97 cents for every dollar they raised from their own sources, but by 1986 this figure had risen above $1.17. Altogether, state-local revenues (exclusive of fed- eral aid) grew substantially over the decade we examined, as figure 2.5. shows, sThe impacts of TRA-86 on states were not entirely negative. In particular, the passage of federal income tax reform laws provided a potential windfall of tax revenues to the states that coupled their income tax systems to the federal tax system. To the extent that these states left their own income tax systems untouched, the elimination of tax preferences from federal income tax would also elimi- nate them as preferences for purposes of determining state income tax liability. Thus, for example, ACIR estimated that federal income tax reform would create a windfall in tax revenues of over 18 percent in six states. At the other end of the spectrum, ACIR estimated that 14 states would receive a windfall of less than 5 percent of total revenues from individual income tax increases. Altogether, state tax liabilities after federal tax reform were estimated to increase $5.2 billion by ACIR. In fact, states have begun to modify their income tax systems ln the aftermath of TRA-86, in some cases returning a large share of revenues to taxpayers. Because modifications are recent, however, their impact is not yet fully known, ACIR also found that, in the absence of states modifying their income tax systems, federal income tax reform would produce a tax shortfall in some states. ACIR estimated that 16 states would lose tax revenues as a result of TRA-86, ranging from 12 percent in North Dakota to less than 1 percent in South Carolina. On all these points see ACIR, The Tax Reform Act of 1986-Its Effect on Both Fed- eral and State Personal Income Tax Liabilities, SR-8, January, 1988; and ACIR, Preliminary Estimates of the Effect of the lQS6 Federal Tax Reform Act on State Personal Income Tax Liabilities, December 8, 1986. Page 23 GAO/H&D-go-34FederalState-Local Relations Chapter 2 Federal Budgetary Retrenchment Increased the State Role in the Intergovemmental System Figure P.5: Qrowth in State-Local RevenjCes, Excluding Federal Aid (1978.8p) 750 Doll8ro In 8lllion8 688 550 4!50 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Year Source: ACIR, Significant Features of Fiscal Federalism, 1989 Edition, vol. I, p, 13. Our examination of trends in state aid to local governments during this period showed that states were most apt to make up losses of federal- local aid in programs that already were within their traditional domains or in which they previously had made significant financial or political commitments. Moreover, the replacement of federal aid and the growth of state and local revenues were often linked to the strength of state and local economies. For example, in Massachusetts, where the economy was strong during most of the past decade, local governments looked to the state for increased assistance when federal revenue sharing funds lapsed, and the state responded in 1987, partially offsetting the loss with state funds. However, 2 years later, when Massachusetts expe- rienced a budget crisis, this aid was cut substantially. Communities in states that were economically depressed during the past decade were less fortunate. For example, Texas made no effort to com- pensate local communities when federal revenue sharing was termi- nated. While the loss of these funds was only one contributing factor, in 1987, fiscal pressure forced 58 percent of Texas cities to raise user fees, 47 percent to postpone planned capital construction projects, 45 percent to raise property taxes, 15 percent to lay off employees, and 10 percent to reduce services. Nearly 57 percent of these communities collected less Page 24 GAO/HRDW-34 Federal-State-LocalRelations chapter 2 Federal Budgetaxy Retrenchment Increased the State Role in the Intergovernmental System revenue in 1987 than projected, and 43 percent anticipated even lower revenues in 1988. As would be expected, the most common strategy for coping with fiscal problems was to defer capital projects, including those required to maintain current service levels. So much so that, by one esti- mate, in 1987 Texas had an $8 billion backlog of such projects with an additional $8 billion projected by 1992.g “Texas Municipal League, “Capital Spending in Texas Cities,” August 8, 1988. Page 25 GAO/~9034 FederalStHehcal Relations Cha$ter 3 in Federal RegulationLessenedState cretion but Not Responsibility Federal budget cuts broadened the role of the states in the intergovern- mental system. In contrast, trends in federal regulatory activities over the past decade lessened state discretion without reducing state respon- sibility. By the late 197Os, the growth of intergovernmental regulation had increased fiscal tensions between federal and state and local gov- ernments significantly. An important part of the Reagan administration strategy to reduce the federal role in the intergovernmental system was to limit regulation of state and local governments as well as the private sector. Anticipating a reduction in regulatory relationships, the adminis- tration also deemphasized intergovernmental grants and traditional grant management techniques designed to create intergovernmental cooperation and consultation. Yet the effectiveness of administration efforts was negated by increased state and local responsibilities stem- ming from added program standards and administrative requirements created during the 1980s and by reduced levels of federal aid for state and local oversight and administration of regulatory programs. Coupled with new federal preemptions of state authority in some policy areas, the overall pattern has been more federal involvement with less finan- cial support. $ince the passage of the first annual cash grant to states under the Past Growth and New ‘Hatch Act of 1887, the federal government has regulated various state Forms of and local government activities by attaching program and administra- Intergovernmental tive requirements as conditions of intergovernmental aid. The rapid expansion of grants and grant requirements in the 1960s and 1970s led Regulation every president since Lyndon Johnson to make efforts to improve the management of this system. Meanwhile, other kinds of regulatory rela- tionships blossomed during the 1960s and 1970s and gained attention.’ In particular, as part of its own stepped-up agenda of social regulation,” the federal government enlisted state and local governments in national efforts on behalf of particular disadvantaged groups or to advance poli- cies, such as environmental protection. In addition to the use of program and administrative regulations issued as direct or indirect conditions of ‘See ACIR, Regulatory Federalism: Policy, Process, Impact and Reform (Washington, DC.: U.S. Gov- ernment Printing Office, February, 1984). “As noted in George C. Eads and Michael Fix, Relief or Reform? Reagan’s Regulatory Dilemma (Wash- ington, DC.: Urban Institute, 1984), p. 12, the term “social regulation” is widely applied to the set of federal programs that *‘use regulatory techniques to achieve broad social goals such as a cleaner environment, equal employment opportunity, or safer and more healthful workplaces.” In contrast, “economic regulation” refers to programs that “attempt to control prices, conditions of market entry and exit, and conditions of service,” usually in particular industries where activities affect the public interest. Nearly all social regulatory programs involve a partnership between national and state or local governments, while programs of economic regulation generally do not. Page 26 GAO/HRD-90-34Federal-State-LocalRelations Chapter 3 Trends in Federal Regulation LessenedState Discretion but Not Responsibility aid, other devices used during the past decade have included preemp- tions, in which federal policies and standards supercede state and local ones, and direct orders, in which the national government directly orders states and local governments to take certain courses of action.” The Reagan administration attempted to slow the growth of social regu- lation and reduce regulation of states and localities and the private sec- tor. Upon taking office in 1981, the administration froze all pending to Decentralize rulemakings, and the President created a task force on regulatory relief to eliminate or modify the most burdensome regulations. Finally, presi- dential review of agency rulemaking was strengthened in 1981, and mechanisms for the Office of Management and Budget (OMB) involve- ment in agency regulatory planning were instituted in 1985, both by executive orders4 These undertakings applied equally to all executive branch rulemaking activities, including those affecting state and local governments. With respect to regulation affecting states and localities in particular, the Reagan administration was the first in recent years to make system- atic efforts to reduce the number of regulations and their costs. Among other administration actions, the Presidential Task Force on Regulatory Relief canvassed state and local governments specifically, generating a long list of regulations these groups perceived to be onerous. Eventually, 24 actions were taken to reduce state and local burdens. According to White House estimates, these saved $4-6 billion in total investment costs and $2 billion in annually recurring costs. The administration also directed agencies to examine the intergovern- mental impacts of proposed regulations in 1981, as part of its general guidance on agency rulemaking. In the case of the OBRA block grants, the administration worked to minimize the regulations attached to these, reducing some 600 pages of program rules and regulations under the aACIR’s typology of intergovernmental regulations includes full and partial preemptions, direct orders, indirect conditions of aid comprised of crosscutting and crossover regulations, and direct con- ditions of aid. For our analysis we grouped partial and full preemptions under the heading of preemp- tions and direct and indirect regulations under the heading of regulatory requirements. These techniques are described in detail in ACIR, Regulatory Federalism: Policy, Process, Impact and Reform (Washington, DC.: U.S. Government Printing Office, February, 1984) ch. 1. 41n lQ81 Executive Order 12291 was issued, creating a system of presidential oversight of agency rulemaldng. In 1986, Executive Order 12498 was issued, creating a system of presidential oversight of agency regulatory planning. For a description of these two programs see Marshall Goodman and Margaret Wrightson, Managing Regulatory Reform: The Reagan Strategy and Its Impact, (New York: Praeger Publishers, 1987) pp. 38-46. Page 27 GAO/HRD-9034 Federal&ate-Local Relations Chapter3 Trends In Federal Regulation LessenedState Discretion but Not Besponslbility folded-in categorical grants to less than 10. In 1985, the White House renewed its review of existing rules, this time working directly with the National Governors’ Association (NGA) to identify burdensome regula- tions and revise them. At the same time, the administration deemphasized traditional intergov- ernmental management mechanisms (e.g., intergovernmental review and consultation procedures for coordinating grant programs), especially at OMB. Thus, in 1981, the Intergovernmental Affairs Division of OMB had 21 staff members, By 1984, this division was eliminated and its respon- sibilities divided among other OMB offices. The Administration also stopped work on a proposed OMB circular to manage so-called crosscut- ting regulations that apply to all federal grants-in-aid. Moreover, it rescinded OMB Circular A-95, which provided for intergovernmental advance notice and comment on intergovernmental grant and regulatory programs. This circular was replaced with a decentralized process of review and comment, to be managed by the states. Finally, the adminis- tration made staff cuts in intergovernmental affairs’ offices across exec- utive branch agencies. In retrospect, the administration was unable to reduce significantly the number of regulations affecting state and local governments or to sub- stantially simplify regulatory programs. Thus, while the statutory objec- tives governing the regulatory system remained largely unchanged, the mechanisms for intergovernmental cooperation in the management of this system were reduced as a result of administration actions. Notwithstanding these administration efforts to reduce regulation of Regulation Increased, state and local governments, intergovernmental regulation increased Funding Was Cut over the past decade, but the growth of regulatory requirements and preemptions was most notable. Conversely, funding for state and local government administration and oversight of regulatory programs was reduced. Reghlatory Requirements In a review of 18 major areas of regulation affecting state and local gov- Increased ernments, we found that the number of regulations increased in most of these areas between 1981 and 1986. Other studies of intergovernmental regulation have come to similar conclusions and also pointed to the often ” prescriptive character of the new rules and requirements. Overall, state and local governments became subject to hundreds of new program standards and administrative requirements. Thus, during the period we Page 28 GAO/HRD-90-34Federal&ate-Local Relations Chapter 3 Trende in Federal Regolation LessenedState DLecretionbut Not Responsibility examined, states became subject to federal mandates in a wide variety of areas, including education, construction projects, health and safety, aged and handicapped rights, and penal institutions, The following are examples of changes affecting state and local governments. Clean Water: municipalities are now required to monitor “nonpoint” pol- lution from thousands of storm sewers and to implement testing for 77 additional chemicals in municipal water supplies. In 1986, the Congress added 83 new drinking water contaminants to be controlled by local gov- ernments under the Safe Drinking Water Amendment of 1986. Education: school districts were required to identify asbestos hazards and then to remove them from local schools. Clean Air: the Congress modified requirements in the Clean Air Amend- ments of 1977. In response to these amendments and court decisions, the Environmental Protection Agency (EPA) reinstated emission standards for asbestos control in 1984 in the areas of provisions for spraying, fabricating, and insulating materials as well as for demolition and renovation. Endangered Species: 152 new species were added to the endangered and threatened lists. These additions required states to prepare status reports on each newly added species and also assigned states monitoring and enforcement responsibilities for protecting these species. Consumer Safety: the Department of Agriculture (USDA) created new requirements affecting the entry of packaging materials to meat processing plants across the entire meat processing industry. Also new procedures for inspection, tagging, and retention of cattle and for inspecting for contaminants were created. These affected states because under title III of the 1967 .Wholesome Meat Act states have inspection and enforcement responsibilities. . Occupational Health and Safety: state monitoring and enforcement responsibilities were affected by Occupational Safety and Health Administration actions requiring businesses and industries to establish and maintain hearing conservation programs, ethylene oxide exposure protection and asbestos protection programs, standards for the use of electricity at construction sites, and a safety program for organizations that respond to environmentally hazardous situations. . Transportation: after much controversy, in 1984 President Reagan signed legislation that required states to adopt a minimum drinking age for alcohol of 21 years old or face reductions of 10 percent in federal highway aid in 1987. At the same time, federal funding for administration and oversight in many of the areas of social regulation declined. Federal grants for Page 29 GAO/HRD90-34 FederalStateLocal Relations Chapter 3 Trends in Federal Regulation LessenedState Discretion but Not Responsibility administration and oversight in some areas, such as bilingual education and clean air programs, declined by nearly 37 percent in constant dol- lars between 1978 and 1988, as shown in table 3.1. Table ‘-1: AdministratIon and Oversight Budge s, Selected intergovernmental 1978-l 988 Regul tory Pro rams (Fiscal Years 1978- Percentage 88) (Co, I stant 19‘152 Dollars) 1978 1988 change Handicapped education $645,788 $1,159,269 79.5 Safe drinking water 37,975 56,431 48.6 Clean air 93,108 125,384 34.7 Occupational safety and health 195,129 182,920 -6.3 Bilingual education 189,565 112,792 -40.5 I Surface mining 115,162 62,163 -46.0 Clean water (total) 4,578,094 2,085,645 -54.4 - Direct assistance 4,482,173 1,964,423 -56.2 ‘For any given year, totals may vary due to change in the number of state administering programs. Source; Office of Management and Budget, United States Budget. Preemptions Increased The Congress has broad authority through, for example, the commerce and supremacy clauses of the Constitution, to preempt state and local laws and ordinances. Traditionally, this authority has been applied to areas of economic regulation, although examples of preemption in social policy areas ntay also be found. In the category of economic preemp- tions, the Airline Deregulation Act of 1978 stipulated that state and local governments may not regulate the routes, rates, or services of air carriers. The Motor Carrier Act of 1980, which deregulated the trucking industry, and the Bus Regulatory Reform Act of 1982, which deregu- lated the busing industry, contained similar preemptions. ACIR examined trends in preemption statutes and found that in every area except bank- ing and civil rights federal preemption was on the rise in the 198Os, as table 3.2 shows. Page 30 GAO/HID-90-34 Federal&ate-Local Relations chapt.er 8 Trends in Federal Regulation LessenedState D&wreUonbut Not Responsibility Tablej3.2: Federal Preemption Statutes, by Dafe of Enactment Health and Date Civil rights Money Business safety Other Total Before 1900 4 l 9 1 l 14 isoo-1909 . . 6 3 l 9 1910-1919 . 1 8 3 3 15 1920-1929 . 1 8 4 l 13 1930-1939 . 8 27 2 4 41 1940-l 949 . 1 8 4 1 14 1950-1959 1 3 11 3 1 19 1960-1969 8 3 8 19 1 39 1970-1979 13 15 20 45 2 95 1980-1988 8 8 22 50 3 91 Total 34 40 127 134 15 350 Source: ACIR, Federal Preemption of State and Local Authority (Washington, DC.: ACIR draft document, May 1989, Appendix A, Inventory of Federal Preemption Statutes), Direct Orders Increased Direct orders issued by the federal government must be complied with by state or local governments or both under threat of civil or criminal penalties. While these kinds of direct orders are not common, over the past decade the federal government has issued new ones. For example, in 1979, the Department of Labor extended Fair Labor Standards Act regulations to state and local government employees. In 1985, these reg- ulations were upheld by the Supreme Court in Garcia v. San Antonio Metropolitan Transit Authority (see app. I). Page 31 GAO/HRD-90-34Federal-State-LocalRelations InqreasedState Prominencein DomesticAffairs: PMgressand Prospects Intergovernmental relations have changed significantly over the past decade as states increased their prominence in domestic affairs. The states have progressed from a period in which they were sometimes dis- missed as mere administrative agents of the federal government to a period in which they are touted as key innovators. They stand on the threshold of the 1990s as highly visible leaders in a broad range of pol- icy areas where the federal government was once seen as peerless. There are a number of reasons for this transformation. First, states improved their capacities by modernizing their institutions and adminis- trations and strengthening their revenue systems. Second, federal budget cuts, tax cuts, and block grants accelerated the rising role of state government in domestic policy in contrast to federal retrenchment. Finally, beginning in 1983, sustained economic growth helped to rebuild state treasuries, providing revenues to fund new initiatives. During the past decade, states broadened their agendas and addressed StaticAgendas Are their social and economic needs in innovative ways. Not all state actions Brobder and Programs have been uniform. However, many states have been active, and state Mor’eInnovative leadership is now widely recognized and reported. Examples of such leadership include the following, from both traditional and nontradi- tional state functions. lInternational Trade: State delegations, often headed by governors, now routinely travel to meet with foreign business leaders to secure new markets and solicit investment. Not all such efforts are ad hoc. By a recent NGA count, 41 states maintained offices in 24 countries world- wide. In fact, by 1989, there were more state offices in Japan (39) than there were in Washington, D.C. (38). . The Environment: At least 29 states have implemented their own Superfund programs and others have created commissions, such as the Chesapeake Bay Commission, to protect and restore the environment. . Housing: States, such as Massachusetts, have established a trust fund, creating a pool of capital for low- and moderate-income housing. Others, including New York, have formed public-private partnerships to achieve these same ends. l Economic Development: Texas has created a Department of Commerce to encourage and coordinate efforts among both public and private insti- tutions with a stake in Texas’ economy. To combat urban economic decline, Pennsylvania has created a regional consortium of labor- management committees to improve cooperation, heighten labor’s role in Page 32 GAO/HRD-W-34FederalState-Local Relations Chapter 4 Increased State Prominence in Domestic AfMrsz Progressand Prospecta industry decision making, and increase productivity. Michigan has cre- ated a public venture-capital fund; using 5 percent of the state’s public pension funds, this development fund promotes new business and eco- nomic enterprises. Arkansas has experimented with a development bank in its efforts to counter rural economic decline. Altogether, 13 states have venture- capital programs, 30 have established business loan funds, and 31 have created research grant programs to encourage eco- nomic development. Growth Management: Florida has enacted legislation aimed at ensuring that adequate infrastructure exists to meet the demands of rapidly growing communities. Health Care: Arizona is experimenting with the use of health mainte- nance organizations to provide quality health care to the poor under the Medicaid program, while also holding down health care costs. Education: States across the nation and especially in the South have taken measures to improve their primary and secondary systems. They are raising performance standards; allocating more funds; reducing fis- cal disparities; and establishing new modes of delivery, such as expanded parental choice and specialized curricula. This record of state action was in large part made possible by a much Improved State longer history of improving state governmental capacities. Since World Capacities Contributed War II, states have made substantial progress in modernizing their insti- to State Prominence tutions and administrative procedures and they have improved their revenue systems. Among other things, these improvements helped state revenues remain fairly stable over the past decade, holding a constant share of overall economic activity. At the same time, state spending increased and expenditure patterns changed. In part, these differences reflect changing state priorities. But they also reflect shifts in national policy and federal court actions. States Modernized Their Having surveyed the administrative, fiscal, and political condition of the Institutions and states, in 1985, ACIR concluded that they had been “transformed” over the previous 25 years. According to the commission, an examination of Administration state “constitutions, legislatures, governors, executive organization structures, courts, personnel, budgeting, financing, and financial admin- istration and openness all attest to this.” In particular, four-fifths of all constitutions were revised between the mid-1960s and 1977. By 1986, * state policymaking was more centralized in the governor’s office because 37 states created cabinets and because many reduced the number of elected state administrative officials. State administrators Page 33 GAO/HRD-90-34Federal-Stat&ocal Relations Chapter 4 Increased State Prominence in Domestic Affidm Frogress and Prospects are better educated, with 61 percent holding graduate degrees in 1984, compared with 40 percent 20 years ago. ACIR evaluated state legislatures against 73 recommendations made by the Citizens’ Conference on State Legislatures in 1970 to improve functionality, accountability, represen- tativeness, and independence. Thirty-eight of 43 recommendations for which assessments existed had been adopted by a majority of state leg- islatures. Finally, courts in almost all states underwent changes to improve the quality of judges, administration, and structure.l States Improved Their Along with modernizing governmental institutions and administrative RevenueSystems processes, nearly all states improved their revenue systems, sometimes substantially. In addition to reflecting state-based initiatives, these changes also may be seen as a response to factors outside the immediate purview of state government, notably the tax revolt of the late 197Os, back-to-back national recessions in the early 198Os, a 16-percent decline in federal grants-in-aid, and the passage of federal tax reform in 1986 (see app. I). Overall, during the past decade two general trends in reve- nues can be identified: a diversification and balancing of state revenue systems and a mixture of tax increases and decreases producing little, if any, net change in total revenues as a percentage of personal income. Balancing State Revenue Since 1961, many states have turned to new kinds of taxes, as shown in Systems table 4.1, Such diversification is viewed as one way to strengthen tax systems because governments become less reliant on any one source of tax revenue. ‘ACIR, The Questions of State Government Capability, A-98 (Washington, DC., U.S. Government Printing Office, 1986). Page 34 GAO/HRD-90-34FederalState-Local Relations Chapter 4 Increased State Prominence in Domeetic AfYahx Progressand Pro~pecta Table 4-l: Adoption of Major Taxes Since 1961 / Additional states Tax levying tax’ Total I Personal income 11 --40 Corporation incomeb 9 44 I Sales 10 45 Gasoline 0 50 Cigarettes 3 -___-- 50 I Distilled sDiritV 0 33 aThree additional states levy a tax on capital gains, interest, and/or dividends only. Alaska repealed its income tax in 1979. bMichigan repealed its corporate income tax in 1976 and replaced it with a single business tax ‘Exclusive of the excises by the 16 states that own and operate liquor stores, and exclusive of North Carolina where county stores operate under state supervision. Source: ACIR, Significant Features of Fiscal Federalism, 1988 Edition. An important consequence of this activity was that personal income taxes-which are regarded as the most progressive-now comprise a larger share of total tax revenues than was true historically. In 1987, these taxes were $2.16 per $100 of personal income whereas in 1978, they were $1.82, as figure 4.1 shows. Page 36 GAO/HRD-90-34FederalState-Local Relations Chapter 4 Increased State Prominence in Domestic AfTairs: Progressand Prospects State Personal Income Tax 88 Per $100 of Pewonal Income 2.S Dollam nor $190 Dollam of Parsonal Income 2.0 1.5 1 .o A 1970 1979 1990 1981 1992 1993 1994 1985 1996 Fiscal Year Source: Steven D. Gold, State Finances in the New Era of Fiscal Federalism, National Conference of State Legislatures, March, 1989. During the past decade states have also turned to nontax sources as alternatives to raising tax revenues. These included user fees, lotteries, special assessments, and increased interest earnings from improved cash management. As a result, in 1986, nontax revenues comprised a larger share of state-local own source revenue than was true in 1978. In fact, between 1975 and 1986, these revenues rose from 3.5 to 4.7 percent of personal income. Reforming Income Taxes Not only did states diversify their revenue systems over the 1978-88 period, they also took steps to reform their income tax systems. As of 1987, the combination of federal tax reform and the recommendations of state tax commissions had produced what one observer called a “bliz- zard” of actions, ranging from modest changes in tax rates and base- broadening to wholesale restructuring. Such reforms have: l made state income taxes more progressive by removing many working poor from state tax rolls, Page 36 GAO/IiRD90-34 FederalState-Local Relations Chapter 4 Increased State Prominence in Domestic Affainx Pro@essand Proupecta . simplified state income taxes by increasing conformity with federal pro- visions and by eliminating many taxpayers from the roles or the ranks of itemizers, . provided for more equal treatment of taxpayers with similar incomes, and l improved the competitiveness of state tax systems through rate reduc- tions in the highest tax states.2 RevenuesRemained Diversification of state revenue systems and income tax reform did not Conftant cause the state-local sector to increase its share of overall state eco- nomic activity during the past decade. Instead, total revenues held their own at about 14 percent of personal income in 1986. Constancy was the norm because while nontax revenues increased, tax revenues declined. In particular, in 1978-the year Proposition 13 was passed-state-local tax revenue was $12.08 per $100 dollars of personal income (see fig. 4.2.). But, during the next 5 years- a period in which the political impacts of the tax revolt became apparent and in which two national recessions occurred-the level of these same revenues dropped to $10.59 by 1982, Thereafter, revenues rebounded, in part due to tempo- rary tax hikes and in part to sustained economic growth since 1983. As a result of these factors, by 1987, tax revenues had made up about one- half of their earlier decline, as figure 4.2 shows. “Steven D. Gold, “The Blizzard of 1987: A Year of Tax Reform Activity in the States,” Publius 18 (Summer, 1988), pp. 17-36. Page 37 GAO/HRD-90-34FederalState-Local Relations Chapter 4 Increased State Prominence in Domestic Af-faim Progressand Prospects Figur4 4.2: State and Local Tax Revenue Per $l/OOof Personal Income (1978-87) 15 Dollam I 14 13 12 - 11 10 9 8 1978 1979 1999 1981 1982 1983 1984 1995 1988 1987 Flacal Yearn Source: Steven D. Gold, State Finances in the New Era of Fiscal Federalism, National Conference of State Legislatures, March 1989. Not all states and communities participated to the same extent in the national economic recovery. As a result, aggregate revenue patterns described in this chapter can mask important differences among states and communities, with some governments enjoying substantial increases and others experiencing very little. These differences notwithstanding, with respect to changes in state revenue systems overall, the past dec- ade has been one in which states have moved away from a strategy of “putting their eggs in one basket.” In so doing, they strengthened their revenue systems by lessening dependence on any one source of tax reve- nue and by exploiting more sources of nontax revenue. At the same time, while state and local tax and nontax revenues (as a percentage of personal income) increased during the most recent 5-year period, these increases have not yet returned revenues to their 1978 levels when expressed as a proportion of overall economic activity. State Spending Patterns State spending followed a path similar to that of state revenues, although, by 1987, spending had slightly exceeded the rate of economic Changed v growth over the period. Exclusive of federal aid, state spending was Page 38 GAO/HRD-90-34FederalState-Local Relations . Chapter 4 Increased State Prominence in Domestic Affairs: Progressand Prospecta $8.12 per $100 of personal income in 1978, compared with $8.77 in 1987, as figure 4.3 shows. Figur 4.3: State Spending Per $100 of PersoI al Income, Excluding Federal Aid 9.0 oollsrs (1978+7) 8.9 I 8.6 8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 8.9 6.8 1979 1979 1980 1981 1982 1982 1984 1988 1988 1987 Year Source: Steven D. Gold, State Finances in the New Era of Fiscal Federalism, National Conference of State Legislatures, March, 1989. Examining differences within categories of spending, the overall increase in the decade is the product of large gains in two categories of spending, Medicaid and corrections. In 1978, states spent 38 cents per $100 of personal income to meet their share of Medicaid costs. In 1987, this same figure was 58 cents. Similarly, in 1978, states spent 21 cents per $100 of personal income for criminal justice and law enforcement, in 1987, they spent 33 cents. Much of this growth can be explained by fac- tors outside the purview of states. With respect to Medicaid, for exam- ple, high rates of inflation were at work as well as federally mandated changes in eligibility and coverage. With respect to criminal justice and law enforcement, fast-paced growth is the product of more stringent state sentencing policies, but also of federal court mandates to relieve inmate crowding and improve prison conditions. Page 39 GAO/HRD-99-34FederalState-Local Relations . chapter 4 Increased State Prominence in Domestic Affairs: Progressand Prospects In summary, the relative stability of overall state spending obscures the more uneven pattern across areas of state budgets. Some of these differ- ences reflect state priority setting, as in the case of education. But they also reflect changes in outside factors, principally economic cycles and federal policy actions. Lastly, state spending trends should be viewed with some caution. Variations exist among states, And, as experts we interviewed noted, spending is not the only way states affect domestic policies. Indeed, many of the innovations described in this chapter illus- trate the impacts that can be made from improvements in management or changes in the manner in which services are delivered. Improved state institutional and administrative capacity was not the National Policy only factor contributing to the rising role of the states in the intergov- Ditiections Contributed ernmental system. Two national policy trends accelerated this process. to State Prominence First, cuts in federal aid and reduced tax revenues limited the federal government’s ability to undertake new initiatives or to maintain federal commitments in existing ones (see app. I). Second, and equally impor- tant, was the Reagan administration’s philosophy of greatly increasing the states’ role in the intergovernmental system. This philosophy was put into action through a few highly publicized initiatives-notably block grants and regulatory relief- as well as through a number of less visible administrative measures, Block Grants An important step taken by the Reagan administration was its initiation of the block grants created in the Omnibus Budget Reconciliation Act of 1981. Although block grants comprised only about 10.5 percent of total intergovernmental aid in fiscal year 1989, they give greater program authority and responsibility to states. At the time OBFtA was passed, there were concerns about the abilities of states to implement these pro- grams prudently. However, to a great extent, the states were able to rely on existing state systems for management of the block grants. And sub- sequent studies of the implementation of these programs, including ours, have been generally favorable. Regulatory Relief A second Reagan administration effort was to reduce regulatory burden on states and localities as described more fully in chapter 3 of this report. In this area, intergovernmental initiatives were part of a larger Y administration effort to reduce social regulation through greater presi- dential oversight of rulemaking. Among other actions, the administra- tion created a task force to identify and revise a number of the most Page 40 GAO/HRD-90-34Federal&ate-Local Relations Chapter 4 lncreaaed State Prominence in Domestic Affalm Fro@wssand Prospecta burdensome federal regulations. In particular, the administration responded positively to an effort by the nation’s governors to bring what they perceived as meddlesome regulations to the federal govern- ment’s attention. The President created a process of presidential over- sight of proposed and planned executive branch agency regulations, including those that affect state and local governments. As chapter 3 also showed, the results of these efforts were mixed; in some cases relief was achieved, especially where there was agreement between the administration and state and local officials about appropri- ate courses of action. This included, for example, speeding delegation of authority to states in many environmental programs. In other cases, efforts failed to bring relief, especially where there was disagreement between levels of government or substantial opposition from other inter- ested groups. Other Administrative Finally, there was a series of less visible executive actions that were Means designed to change the tone of the relationship between state and fed- eral governments. In 1983, the President issued Executive Order 12372 requiring federal agencies to make efforts to accommodate state and local government recommendations concerning federal programs in their jurisdictions. This order, which revoked OMB Circular A-96, effectively shifted the loci of review for some 100,000 grant applications to the states by encouraging states to develop their own procedures and priori- ties with respect to federal financial assistance, and requiring federal agencies to defer to them whenever possible. Likewise, in 1988, the basic circular for management of grants to states and localities, OMB Cir- cular A-102, was revised to require agency reliance on state systems and procedures for monitoring grants. In addition, in 1987, the President issued Executive Order 12612. It requires all federal agencies, among other things, to determine when a proposed policy has implications for states and localities and to prepare a federal assessment discussing such implications where they are significant. Page 41 GAO/HRD-90-34FederalState-Local Relations Chapter 4 Increased State Prominence in Domestic Affibc Pro@ese and Prospects I Like improved state capacity and shifts in national policy directions, ional and State national and state economic recovery from the 1982 recession contrib- omit Recovery uted to the increasing role of states in the intergovernmental system. tributed to State Sustained economic growth has provided state and local governments with important flexibility. The resulting rise in state revenues was a key Prqninence factor driving increased state spending. In fact, it allowed a number of states to reduce taxes without decreasing spending. While states diversified their revenue bases over the 197888 period, they remain highly dependent on sales and income taxes, sources that fluctuate with the economy. In 1986, income and sales taxes comprised nearly 87 percent of all state own-source revenue. Because most states balance their yearly operating budgets, economic cycles have significant short-run effects. As figure 4.4 suggests, during the past decade many states experienced generally flat sales and income tax collections in the aftermath of the 1982 recession, Sales Tax Revenues (Fiscal Years 1978-86) (CorMant 1982 Dollars) 149 Dollam In Bllllons 1311 130 1979 1979 1992 1993 1994 1995 1996 Fiscal Yearn Source: ACIR, Significant Features of Fiscal Federalism, 1988 Edition, vol. II, p. 60 For example, sales tax receipts were generally flat from fiscal years 1978 to 1984. The impact of this was immediately reflected in state budgeting. In fiscal year 1982,25 states cut budgets after enacting them. Page 42 GAO/HRD-9034 FederalState-Local Relations Chapter 4 Increased State Prominence in Dome8tic Mfaim Progressand Prospects In fiscal year 1983,39 states did so. State Policy Reports, a publication monitoring state governmental fiscal policies, recently estimated that states’ receipts would have decreased by $11 billion if a mild recession were to have occurred in 1989, and by $22 billion in a severe recession. States have attempted to protect themselves from the slower revenue growth that would likely result from a recession by creating special reserve funds. While 29 states have established such stabilization or “rainy-day” funds that could be used if a recession or other event caused state revenues to decline, reserves are not sufficient to weather an economic downturn. Additionally, states’ year-end general fund bal- ances were substantially lower as a percentage of general expenditures in 1988 than in 1978, as figure 4.5 shows. As the figure also makes clear, in both percentage and absolute dollar terms, fund balances fol- lowed a ragged trend in the 198Os, but one that generally declined. Figu+ 4.5: State Year-End Fund Balances (1978-88) 12 11 10 9 6 7 6 6 4 3 2 1 0 flaoal Years Dollars in billions As a percentage of general expenditures Source: State Policy Reports, vol. 5, no. 8, April 26, 1987, p. 5. Page 43 GAO/HRD-90-34FederalState-Local Relations ChapterI 6 Trkmdsof the Past DecadeRaiseImportant Is&es for Federal Policymakers Over the past decade, federal budget and regulatory trends have moved the intergovernmental system in different directions. While budget trends helped to elevate the states to the center of domestic policymak- ing and leadership, regulatory trends lessened state authority without reducing state responsibility. Both raise important issues for federal policymakers. As a result of the high degree of shared responsibility among federal, state, and local governments in the intergovernmental system, the success of federal domestic programs depends on an effec- tive partnership among these governments. Thus, federal fiscal and reg- ulatory trends that significantly affect states and localities also may have important implications for the federal government. Based on our review of these trends, we identified three emerging issues that have such implications. . First, the fiscal gap between wealthier and poorer states and localities has widened. Although the federal government depends heavily on the institutional and financial capacity of state and local governments to administer its grants-in-aid programs, over the past decade federal budget cuts helped to widen the fiscal gap between wealthier and poorer states and localities, This, in turn, is one warning sign that inequities in the levels of basic state and local public services (e.g., police, primary education, and infrastructure) may be increasing. It also may indicate that some communities lack sufficient revenues from their own sources to meet their share of federal program costs, thereby undermining national goals and objectives. . Second, tensions have mounted over the past decade as regulation of states and localities increased. The federal government depends heavily on the goodwill and cooperation of state and local governments to imple- ment its regulatory programs. Thus, it is in the federal interest for these governments to share federal objectives. States and localities should also be in overall agreement with federal program structure and manage- ment. Yet state and local officials we interviewed were disturbed by the growth and cumulation of federal mandates and regulatory require- ments. Over the same period, federal funding supporting the programs declined, and traditional management techniques used to create coopera- tion and consultation among levels of government atrophied, adding to these tensions. We believe that intergovernmental regulation plays a very useful role in the achievement of federal goals and objectives. Yet, we also believe that the cumulative effect of these increases-coupled with decreasing federal aid-ultimately could force state and local governments to choose between meeting their service responsibilities and fulfilling Page 44 GAO/HRD-90-34FederalState-Local Relations Chapter 6 Trende of the Past DecadeRaise Important Ieaueefor Federal Policymakers national regulatory objectives, This kind of divergence in state and national priorities is likely to reduce the effectiveness of these govern- ments as agents of national regulatory policies, especially during periods of economic decline. Given the importance of providing basic state and local services and attaining federal regulatory objectives, neither situa- tion would be asfactory. . Third, fiscal and regulatory trends pose concerns for growing state lead- ership. By the end of the decade we examined, states had reemerged as principal domestic partners with the federal government and had become policy leaders and program innovators in their own right. How- ever, precisely because states occupy an increasingly central place in the intergovernmental system, these trends may eventually place too much fiscal pressure and program responsibility on states, especially during periods when national or regional economies are weak. This, in turn, might slow- or even reverse-the aforementioned progress. Neither fiscal circumstances nor the need for public services are uni- Federal Budget Trends form across states and localities. Both vary, often so that communities Exacerbated Growth with the greatest needs have the least resources to meet them. Fiscal in State and Local disparities characterize the situation in which different jurisdictions must tax their citizens and businesses at different levels to obtain simi- Fiscal Disparities lar amounts of revenue. These disparities-both among states and across localities-increased during the past decade. Per capita income is commonly used to measure fiscal disparities because it captures revenue raising capacity and the relative ability to bear tax burdens. Using per capita income to assess fiscal disparities, figures 6.1 and 6.2 show that, after decreasing in the late 197Os, dispari- ties among counties began to grow in the 1980s. Page 45 GAO/HRD-90-34FederalState-Local Relations Chapter 6 Trends of the Past DecadeRak Important Issues for Federal Policymakera Figutb 5.1: Number of Counties Above or BeloG the Natlonal Per Capita Mean Numbor of Countlos Incode in 1979 and 1987 999 Below 70% 7950% 120-130% Above 130% Poroontage of per Capita Mean Income Source: GAO calculations based on U.S. Department of Commerce Bureau of Economic Analysis data. For example, figure 5.2 shows that the number of very poor counties (where per capita income was below 70 percent of the national average) rose from 711 to 871, a 22-percent increase. In contrast, the number of very wealthy counties (where per capita income was above 130 percent of the national average) rose from 54 to 72, a 33-percent increase. More- over, figure 5.3 shows that over the past decade the U.S. population has become increasingly concentrated in wealthier or poorer counties, with fewer people living in middle-income counties in 1987 than in 1977. Page 46 GAO/HRD-90-34Federal-State-LocalRelations Chapter 6 Trend8 of the Past Decade Raise Important hues for Federal Polkymakere Figure 4.2: Population of Countlea, Classiflied by County Per Capita Perronal Income!as a Percentage of U.S. Per Perwnl of U.S. Population Capita i ncome (1977-87) Percentages in the legend represent percentages of the average per capita personal income for the United States. Source: GAO calculations based on US Commerce Department Bureau of Economic Analysis data. The increases in disparities between wealthier and poorer communities are chiefly attributable to changing economic conditions, but reductions in federal grants-in-aid have exacerbated their impact because, by and large, grants have constituted a greater proportion of total revenues of poor communities than of wealthy ones. As a result, federal aid reduc- tions when expressed as losses in shares of total government revenues may be taken as an indicator that disparities are growing. Page 47 GAO/HRD-90-34Federal&ate-Local Relations chapter 5 Trend@of the Past DecadeRake Important Ieeueafor Federal Policymakers There was a consensus among the state and local officials and experts Stakeand Local we interviewed that recent federal regulatory trends pose a problem to Off6icialsand their leadership. In particular, the expectation that regulatory require- Int ’ rgovernmental ments, mandates, and preemptions would accelerate was identified as an important negative trend on the intergovernmental horizon. Not only did Ex erts Believe experts foresee accelerating financial burdens that would stem from Re ulatory Trends new federal requirements and mandates as problematic from the per- Cai se Problems spective of state and local fiscal systems, they also see the prospect of nonconsultation in the design of programs as a counterforce to the prog- ress of states as leaders and program innovators. Yet the trend could continue for the following reasons: . Regulation of states and localities is a relatively easy strategy for the federal government to use to achieve national objectives without increasing federal fiscal commitments, and . judicial protection against at least some forms of federal intervention had been presumed to flow from the Tenth Amendment. But this was laid to rest by the Supreme Court as a result of its recent holdings in the Garcia v. San Antonio Metropolitan Transit Authority and South Caro- lina v. Baker decisions (see app. I). State and local officials and experts we interviewed told us that the bur- den associated with all forms of federal regulation affecting state and local governments has increased over the past 10 years. A number of those we interviewed attributed some of the rise in intergovernmental regulation to the fact that it provided federal policymakers an attractive way to achieve national objectives without adding to the deficit. For example, Governor Michael Castle of Delaware has concluded that- through intergovernmental regulation -the Congress can shift the tax burden for its decisions to the states, forcing them to be tax collectors for federally mandated programs. Those we interviewed also regard insufficient consultation in the design of regulatory programs as a problem. With respect to formal mecha- nisms, the decline of traditional management techniques that encourage intergovernmental cooperation and consultation has most likely exacer- bated the problem. While the Reagan administration regarded these kinds of management tools as unnecessary given its plan for simplifying intergovernmental relations, a streamlined system for such relations was never achieved. As we found, the intergovernmental system was Page 48 GAO/HRD-90-34FederaLStatehcal Relations Chapter 6 Trenda of the Past DecadeRaise Important Issues for Federal Policymakers more complex in 1988 than in 1978. Thus, the abandonment of tech- niques designed to promote consultation and cooperation in the develop- ment and implementation of domestic programs seems premature. Overall, there appears to be a growing paradox in the intergovernmental system stemming from increased intergovernmental regulation. As one intergovernmental expert we interviewed said, there is a perception of a “state renaissance” on one hand, but a lack of “political respect” at the national level for state authority on the other. This expert said that: “The states are perhaps more qualified and professional than they have ever been, yet simultaneously are treated worse at the national level.” Out of its concerns about these trends, the National Governors’ Associa- tion (NGA) has undertaken studies of how to address its “balance of power” concern. While NGA identified a range of possible solutions, many states are seeking a constitutional amendment to better protect their role in the federal system. The association took the first step at its August 1988 meeting by asking the Congress for an amendment that would allow the states to initiate constitutional amendments without calling a convention. This, NGA believes, would make the threat of consti- tutional change more credible, in turn making the Congress more respon- sive to state concerns. According to the association, such an amendment would provide a new “check-and-balance” tool in lieu of institutional protection accorded by the Court before the Garcia and South Carolina decisions. By the end of the decade we examined, states had reemerged as princi- Federal Budget and pal partners with the federal government and domestic policy leaders Requlatory Trends and program innovators in their own right. Because heightened state Could Adversely prominence reduces dependence on the federal government and enhances opportunities for domestic policy innovation and problem Affect State solving, it was viewed by those we interviewed as a positive develop- Prominence ment that should be encouraged. Moreover, in light of federal budgetary pressures, it is in the federal government’s interest for states to play an increasingly active role with respect to achieving national program objectives. Clearly, if states are to progress further, however, maintain- ing this momentum is important. While progress can never be fully assured, the combination of federal budgetary and regulatory trends described in this report appears to pose a special concern to the rise of states as leaders and innovators for Page 49 GAO/HRD-99-34FederalStatehcal Relations Chapter 6 Trends of the Paat DecadeRaise Important Issues for Federal Policymakers the following reasons. First, the overall decline of federal aid and the reduction of grants-in-aid from the federal to local governments in par- ticular have put pressure on states to make up lost revenues, both in their own programs and in those administered by localities within their jurisdiction. We expect these pressures to continue, or even accelerate, as the federal government pressures the states to help implement new federal programs to address domestic problems. Second, with respect to the proliferation of regulations, state and local officials and experts we interviewed rejected the adage, “You can’t get too much of a good thing.” Instead, they cautioned that federal reliance on unfunded regulation should be used judiciously in the future. It is important for federal policymakers to consider the costs of such regula- tions and how regulations promulgated at different points in time and in different policy areas interact. Inadvertently, mixtures of conflicting and overlapping regulations may reduce the flexibility of states to deliver public services and administer federal programs, Finally, economic circumstances are not uniform across states and local- ities. Different conditions exist, making some states and regions more vulnerable to this conflicting combination of federal budget and regula- tory trends. And all states-by virtue of their vulnerability in times of recession-face the prospect that an economic downturn may exacer- bate the problem of meeting state-determined public service needs and priorities while also responding positively to national grant and regula- tory program goals and objectives. This, in turn, might slow-or even reverse-state progress, progress that over the past decade has reduced the dependence of states on the federal government, increased state sup- port for local governments, and helped the federal government to achieve its myriad domestic goals and objectives. Page SO GAO/HRD-90-34Federal&ate-Local Relations Y Page 61 GAO/HRLMO-34FederalState-M Relations PIW A@;lkergovernmentail Events: 1978-88 During the 1978-88 period, two sets of events pulled the intergovern- mental system in opposite directions and contributed to important changes in its character. The first set is comprised of measures that decentralized the federal system by narrowing the federal role and broadening that of the states. At the outset, two events-the tax revolt of the late 1970s and the election of Ronald Reagan as president in 1980-signified the arrival of a more conservative era in national poli- tics and set in motion the process of federal retrenchment. Thereafter, the passage of the Omnibus Budget Reconciliation Act of 1981, the Eco- nomic Recovery Tax Act of 1981, the Gramm-Rudman-Hollings Act of 1986, and the Tax Reform Act of 1986 shifted greater responsibility for financing and delivering public services to state and local governments. During this same period, other factors pulled intergovernmental rela- tions in the opposite direction and broadened federal authority over state and local affairs. In areas of new or heightened public concern, demands for national leadership sometimes led the federal government to increase its role in domestic policy. In particular, new or lesser-used tools of federal action were exploited in lieu of more traditional grants- in-aid, notably preemption, regulation, and direct mandating of state and/or local action. Moreover, two recent Supreme Court rulings deter- mined that the Congress and national political processes, not the judici- ary, should decide the balance of power between federal and state governments. - To begin chronologically, California’s Proposition 13, passed in 1978, Proposition 13 limited property tax rates, thereby slowing the rate of growth of public spending in that state. The passage of this citizen-based initiative was significant for the intergovernmental system because it indicated public support for more limited government. The inauguration of President Ronald Reagan signaled the arrival at the Election of President national level of a chief executive committed to reducing the size and Rbagan scope of government and to an intergovernmental system giving much greater prominence to states and localities. In particular, his objectives were: l to shrink the role of all levels of government in comparison with the private sector. To achieve this objective, the administration made strong efforts to cut taxes, eliminate grant programs, deregulate areas of social regulation, and privatize governmental functions. Page 62 GAO/HRD-90-34Federal-State-LocalRelationa Appendix I Key Intergovernmental Events: 1979-M l to return to a more “dual” form of federalism by stepping back from the “cooperative” federalism that had evolved over the past 50 years. This effort manifested itself in the elimination of federal intergovernmental communication structures, revisions of federal guidance on regulations and rules for managing federal aid, and the creation of block grants as a substitute for categorical programs. l to devolve certain federal responsibilities to the subnational level. This included successful efforts to end federal involvement in many regional cooperation programs within and among states, to establish primacy for states in social regulatory programs, and to reduce substantially federal enforcement in these same programs. It also included the ill-fated 1982 welfare swap proposal,l which would have removed the federal govern- ment from several significant income security programs. Altogether, the Reagan administration employed four specific strategies to achieve these objectives: budget cuts, tax cuts, block grants, and regu- latory relief initiatives. And the President experienced moderate success in these efforts. As a result, Reagan federalism strategies are evident in other events of the decade identified as important in this report. They are (1) the Omnibus Budget Reconciliation Act of 1981 (onn~); (2) the Economic Recovery Tax Act of 1981 (ERTA); (3) the so-called Gramm- Rudman-Hollings Act of 1985 (GRII); (4) the elimination of the General Revenue Sharing program in 1986 (GRS); (5) the Tax Reform Act of 1986 (TRA); and (6) two Supreme Court decisions, Garcia v. San Antonio -.--.Met- ropolitan Transit Authority (1986) and South Carolina v. Baker (1988). ____l___l_--._ -_- In fiscal year 1981, there were some 538 separate federal grant pro- Omnibus Budget grams, prompting great concern among policymakers about how best to Reconciliation Act manage and control the system. One way, which gained support in the (1981) early 1980s was to reduce the grant system’s size and complexity. Thus, in 1981, legislation including the Omnibus Budget and Reconciliation Act cut domestic spending by $35 billion, eliminating 59 grant programs and consolidating nearly 80 narrowly focused categorical grant programs into nine broad-based block grants. Significantly, many of grants elimi- nated by OIW had been federal-local, while all the block grants created by it were state-administered. The objectives of these efforts were (1) to ’ IJndcr this proposal the federal government would have returned to the states full responsibility for funding the Aid to ‘Families with Dependent Children and Food Stamp programs in exchange for the federal assumption of state contributions to Medicaid. See Timothy Co&n, New Federalism: Inter- @vornmontal Reform From Nixon to Reagan. (Washington, D.C.: The Brook= Institution, 1988), p. 185. Page 53 GAO/HRD-90-34Federal-State-LocalRelations Appendix I Key Intergovernmental Events: 1978-88 focus greater program responsibility at the state level; (2) improve ser- vice delivery by fostering better integration of related federal and state programs; and (3) save 26 percent over the cost of the folded-in pro- grams by emphasizing the use of existing state administrative systems. In retrospect, OBRAreduced the size and complexity of the intergovern- mental grant system only marginally. Yet the passage of this act was significant because it visibly enhanced the position of states in the fed- eral system at the expense of localities, while also reducing federal financial commitments in the programs eliminated or turned into block grants by OBRA. The Economic Recovery and Tax Act (ERTA) of 1981 reduced federal E&non& Recovery income tax collections from corporations and slowed the rate of growth an@Tax Act (1981) for individual income tax receipts. Without countervailing budget cuts, however, the federal deficit began to grow dramatically in the aftermath of this historic legislation. Tax losses associated with ERTA were esti- mated to have been $294 billion by 1987, and this led directly to passage of the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982. In retro- spect, the passage of ERTA was a significant event in intergovernmental relations because it reduced federal revenue-raising potential, which, in turn, launched the present quest for cuts in all forms of discretionary spending, including intergovernmental grants, loans, and tax subsidies. The Balanced Budget and Emergency Deficit Control Act of 1985, better Gramm-Rudman- known as Gramm-Rudman-Hollings or GRH, established deficit-reduction Hollings Act (1985) targets for the federal government that were intended to force policy- makers to balance the budget by 1992. Under GRH, if established targets are not met, sequestration and subsequent across-the-board cuts occur automatically. While there has been only one sequestration and GRH has been weakened by amendment and statutory interpretation, the law is an important event in intergovernmental relations. Gnu gains its signifi- cance because, since its passage in 1985, legislators must, in effect, find comparable budget savings to offset the federal costs of new programs. In Garcia the Supreme Court ruled that state and local employees are Garcia v. San Antonio ~ covered by the federal Fair Labor Standards Act (FLU). In so doing, the Metropolitan Transit Court affirmed that Congress has broad power to regulate the wage and Authority (1985) hour laws of state and local employees. Of more general importance, the Court overturned an existing precedent established in National League of Cities v. Usery (1976) that-at least in areas of integral state and Page 54 GAO/HRD-90-34Federal-State-LocalRelations Appendix I Key Intergovernmental Events: 1979-88 local operations -the Constitution prohibits direct federal regulation of these governments. Perhaps most significantly, the Court officially renounced its historical role of judicial umpire between the federal and state governments with respect to claims of protection under the Tenth Amendment, reserving for the states, or to the people, those powers not delegated to the national government or constitutionally denied to the states. Thus, Garcia is important for the intergovernmental system because it firmly established the judicial principle that state and local government participation in national political processes is the most acceptable means of redress against unwelcome federal intervention. 1 As part of a successful effort to lower individual and corporate tax rates The!Tax Reform Act by broadening the tax base, the Tax Reform Act of 1986 eliminated the of 1086 deduction for state sales taxes previously enjoyed by individuals who itemize on their federal tax returns (TRA-86 left identical preferences for income and property taxes untouched). The decision to eliminate the sales tax deduction was controversial in a number of respects. Because burdens fell disproportionately on states that rely heavily on sales taxes for revenue, selective elimination was criticized as discriminatory. More- over, because it constituted an incentive to alter the structure of state and local taxation, selective elimination was viewed as an undue inter- ference in state and local finance decisions. Finally, some state and local officials feared that eliminating the sales tax deduction was only the first step in a process that ultimately would end such deductions altogether. TRA-86 also placed stricter limits on the use of tax-exempt bonds, espe- cially private-activity revenue bonds. Not only did TRA-86 lower existing limits on bond volume dramatically, to $50 dollars per capita issued per year in most states, it also placed more categories of bonds in this capped category. Finally, TRA-86 contained a substantial number of new provisions designed to curb perceived abuses in public-private partner- ships and in cash-management strategies regarded by the Congress and the Treasury Department as schemes explicitly intended to generate arbitrage.2 TRA-~~ changes are important for the intergovernmental sys- tem for several reasons. Altogether, they raise the level of federal intru- siveness in state and local finance significantly. In particular, the restrictions of ~1~436 on the deductibility of state and local taxes are the “Arbitrage is earned when states and localities invest bond proceeds in higher-yielding securities before expending funds. For example, before passage of TRA-86 states and localities commonly invested bond proceeds in higher-yielding securities during often lengthy capital project construction periods. Page 66 GAO/HRD99-34 Federal-State-LocalRelations i . Appendix1 Key IntergovernmentaI Events: 1978-88 first since passage of the modern income tax in 1913. Moreover, ~~~-86's bond reforms have restricted a primary source of capital at a time when state and local governments are relied on more heavily to finance infra- structure and other capital projects. At one time, the general revenue sharing (GRS) program (enacted in Elimination of General 1972) distributed virtually unconditional fiscal assistance to all 50 Revenue Sharing states and about 39,000 general purpose local governments. The pro- gram was eliminated for states in 1980 and for local governments in wps> I 1986. From an intergovernmental relations perspective, the termination ~ of revenue sharing is significant for reasons related to its philosophy I and funding. While the program was sometimes criticized for giving state and local governments too much discretion and federal budget def- icits probably made it politically untenable, GRS had a number of com- mendable features. First, the program made maximum use of subnational administrative structures, making it among the most eco- nomical of intergovernmental aid programs to administer. Second, GRS had very few conditions attached to it, making it among the most flexi- ble grants-in-aid. Finally, revenue sharing was moderately targeted at the local level. GRS was one of only 29 programs that used income as part of their allocation formulas. The elimination of the local-government component of GRS in 1986 is especially significant for intergovernmental relations because it further reduced (and in the case of many very small towns and townships it eliminated) federal-local grants. It is also an important event because in some communities revenue sharing constituted a significant share of total revenues-as much as 23 percent in some fiscally distressed places. The loss of GRS forced many such governments to seek replace- ment revenues or to reduce services. In South Carolina, the Supreme Court affirmed its Garcia reasoning that SoClthCarolina v. states must seek protection from unwelcome federal regulation through Balker, Secretary of national political processes. As t,he majority opinion restated, the Court the Treasury (1988) will not restrict the federal government’s reach by searching out doctri- nal limits on it in the Tenth Amendment. In particular, the Court ruled invalid South Carolina’s claims that conditioning federal tax exemption J on a TEFRA requirement that state and local bonds be issued in “regis- tered” rather than “bearer” form violated the Tenth Amendment and the principle of reciprocal tax immunity. And, having dismissed both Page 66 GAO/HRD-90-34FederalState-Local Relations Appendix I Key Intergovernmental Events; 1979-98 charges, the Court negated a nearly loo-year old Supreme Court prece- dent (Pollock v. Farmer’s Trust), which heretofore had been deemed to protect municipal bond interest from federal taxation. South Carolina is important for the intergovernmental system because it reinforced the Court’s position that political and administrative, rather than judicial, actions are to define the relationship between the national and state governments. With respect to intergovernmental finance issues, the decision is a watershed event because it explicitly establishes the superiority of the federal government in matters of tax immunity. Moreover, by making municipal bond law a matter of statutory prefer- ence rather than constitutional principle, the Court opened the door to further federal regulation of state and local finance decisions. After South Carolina it is clear that the Congress has the right not only to regulate abuse and control the volume of municipal bonds, but that it also has the power to render bonds issued for any purpose-including basic public infrastructure-taxable. Page 67 GAO/HRD-90-34Federal%ate-Local Relations Appendix II PersonsInterviewed to Develop Issuesin This Report Name Current position and affiliation -Wayne F. Anderson Professor, George Mason University Enid Beaumont Director. Academv of State and Local Governments Norman Beckman Director, Washinaton Office, Council of State Governments Jonathan Bruel Senior Analyst, Office of Management and Budget John Chubb Research Fellow, Brookings Institution William G. Colman Consultant, Advisory Commission on Intergovernmental Relations Timothy Conlan Assistant Professor, George Mason University James Frech Consultant, National Academy of Public Administration Harold Hovev President, State Policv Research, Inc. Kirk Jonas Deputy Director, Virginia Joint Legislative Audit Review Commission _I_. John Kincaid Executive Director, Advisory Commission on Intergovernmental Relations Ann T. Lichtner Director, Intergovernmental Relations, Department of Administration. State of North Carolina Jerry Miller Executive Director, National Association of State Budget Officers - Richard P. Nathan Professor, Princeton University Nonna A. Noto ;,p;vtX;ist in Public Finance, Congressional Research Sandra Osbourn Specialist in American National Government, Congressional Research Service Paul Peterson Professor, Johns Hopkins University Robert Raymond Special Assistant to the Deputy Assistant Secretary for Planning and Evaluation, Department of Health and Human Services Mavis Mann Reeves Professor, University of Maryland JohnShannon Consultant, Urban Institute ____- -- Carl Stenbera Executive Director. Council of State Governments Enda Tarr-Whelan Executive Director, National Center for Policy Alternatives -___- David B. Walker Professor, University of Connecticut Joan Wills Former Director, Research and Development, National Governors’ Association Deil S. Wright Professor, University of North Carolina at Chapel Hill Margaret Wrightson Assistant Professor, Georgetown University Dennis Zimmerman Specialist, Congressional Research Service -__ Daniel Soyer Former Director of Communications, Massachusetts Municipal Association Dr. Lynn Bradbury Director of Policy and Legislation, Office of the Speaker of the House of Representatives, Commonwealth of Massachusetts ____ Paul Mahoney Administrative Assistant, Office of the Senate President, Commonwealth of Massachusetts (continued) Page 58 GAO/HRD-90-34Federal-State-LocalRelations Appendix II PersonaIntervIewed to Develop Issues in ThIB Report Name Current position and affiliation Robert H. McClain, Jr. Undersecretary, Executive Office of Administration and Finance, Commonwealth of Massachusetts Michael W. Tierney Assistant Secretary, Executive Office of Communities and Development, Commonwealth of Massachusetts Richard T. Howe Assistant Secretary, Executive Office of Communities and Development, Commonwealth of Massachusetts Marilyn Contreas Senior Policy Analyst, Executive Office of Communities and Development, Commonwealth of Massachusetts William Hamilton Assistant Director, Economic Analysis Center, Office of the Comptroller of the Public Accounts, State of Texas Phyllis Coombes Supervisor Federal Issues Group, Office of the Comptroller of the Public Accounts, State of Texas Jay G. Stanford Executive Director, Advisory Commission on Intergovernmental Relations, State of Texas Ron Lindsay Director, Office of Planning and Budgeting, State of Texas Rich Thomas Director of State Affairs, Office of State Develobment. State of Texas Sheila Beckett Deputy Director, Office of Planning and Budgeting, State of Texas Tom Adams Assistant Deputy Director, Office of the Intergovernmental --. Relations Governor, State of Texas Max Sherman Dean, Lyndon Baines Johnson School of Public Affairs, Universitv of Texas -Frank Sturzel Executive Director, Texas Municipal League Jim -_..--Oliver Director, Legislative Budget Board, State of Texas Gordon Arnold Executive Assistant to the Speaker of the House of - Representatives, State of Texas Kurt Spitzer Executive Director, Florida Association of Counties Robert Bradley Executive Director, Advisory Council on Intergovernmental Relations, State of Florida Martin Young Policy Coordinator, Office of Planning and Budgeting, State -.I_- _l_l_ of Florida - Raymond Sittig --.-- Executive Director, Florida League of Cities Hon. Larry Durence President of Florida Lake City, City of Lakeland, Florida Jim Zingale S$$;irector, House Appropriations Committee, State of Maxine McConnell Budget Analyst, Senate Appropriations Committee, State of Florida Ed Woodruff Budget Analyst, Senate Appropriations Committee, State of __--- Florida Elton Revel1 Senior Analyst, Senate Appropriations Committee, State of Florida Dale Hickham ;en,i;;Analyst, Senate Appropriations Committee, State of ____ Charles Brown Executive Director, Legislative Council, State of Colorado - Daniel Stewart Associate Commissioner, Department of Education, State of Colorado (continued) Page 69 GAO/HRD-90-34Federal-!%ate-LocalRelations - .-. .I’“---- --1-1 , Appendix II PersonsInterviewed to Develop Issues in This Report ..~.. -_-. .-.^.--- - Name Current position _..~---- . and affiliation __- Robert Moore Deputy Director of Finance and Administration, Commission -. ~-on.~~.-- Higher Education, State of Colorado Timothy Holemen Policy Analyst, Policy Research, Governors’ Office, State of Colorado ___--.- The Honorable Robert Mayor, City of Colorado Springs, lsaacs Colorado Ann Alter Intergovernmental Specialist, Office of the City Manager, Citv of Colorado Sprinos. * - Colorado .___ George Delaney Deputy Director, Office of State Planning and Budgeting, State of Colorado Curt Wiedeman Assistant Director, Office of State Planning and Budgeting, State of Colorado B.J. Thornberry Deputy Chief of Staff, Office of the Governor, State of Colorado Timothy Schultz Executive Director of Local Affairs, Department of Local Affairs, State of Colorado Nanci Kadlecek Deputy Director, Department of Administration, State of Colorado ~~~---.- -__- Samuel -Mamet Associate Director, Colorado Municipal League Page 60 GAO/HRD-90-34FederalState-Local Relations I* Appendix III l@jor Contributors to This Report John M. Kamensky, Assistant Director, (202) 276-0563 HLI.I$UIResources Robert W. Gage, Evaluator (employed by GAO under the Intergovern- Division, ment Personnel Act, and has since returned to his position as Washington DC. Associate Professor, University of Colorado at Denver) Margaret Wrightson, Evaluator Brian Lepore, Evaluator Ann M. Barr, Evaluator Page 61 GAO/HRD-W-34FederalStateLmal Relations B$bliography Block Grants: Federal-State Cooperation in Developing National Data Collection Strategies (GAO/HRD-89-2, Nov. 29, 1988) Washington, D.C. GAO believes the cooperative approach to data collection is a viable way to obtain national block grant data although some data may not be com- parable. Generally, the data gathered were timely and officials in the six states we reviewed perceived the data collection efforts to be less bur- densome than reporting under the prior categorical programs. But the voluntary approach may not be useful for other federal programs due to the incomparability of the data collected. Legislative Mandates: State Experiences Offer Insights for Federal Action (GAO/HRD-88-76, Sept. 27, 1988) Washington, D.C. GAO found that federal mandate cost estimating had little effect on five of the eight bills reviewed because legislators were more concerned with program and policy issues than with the costs they imposed on states and localities. But cost estimates had a significant impact in the states when prepared early in the legislative process. Mandate reimbursement worked in the states if the public initiated the requirement through a referendum or there existed a constitutional amendment requiring it, and the state was experiencing a healthy fiscal climate. GAO believes that the federal government could focus attention on the impact of fed- eral legislation on state and local costs by providing estimates for key bills before full committee reports and biennial reports to increase legis- lators’ awareness of mandated costs. Block Grants: Federal Set-Asides for Substance Abuse and Mental Health Services (GAO/HRD-88-17, Oct. 14, 1987) Washington, D.C. We studied eight states and found that: (1) most states allocated their funds according to historical trends to maintain existing services, (2) states met the requirement to set aside funds either by expanding existing services or by passing on the responsibility to local or county service providers, (3) most states neither received increased block grant funds nor provided additional funding to service providers, (4) most state officials stated that they would continue these services even with- out the set-aside requirement, and (5) a majority of recipient interest groups believe that their states’ commitments to the services would decrease if the Congress eliminated the set-aside. Page 62 GAO/HRD90-34 Federal%ate&ocal Relations Bibliography Grant Formulas: A Catalog of Federal Aid to States and Localities (GAO/ HRD-87-28, Mar. 23, 1987) Washington, D.C. The catalog provides: (1) an in-depth understanding of formula alloca- tion, (2) information on the agencies and congressional committees that have jurisdiction over the programs, (3) the amounts of program alloca- tions, and (4) the sources and timeliness of the statistical data used in making funding allocations. Health Care: States Assume Leadership Role in Providing Emergency Medical Services (GAOIHRD-86-132, Sept. 30, 1986) Washington, D.C. States have assumed a more active leadership role in financing and reg- ulating the local delivery of emergency medical services. The six states GAO visited reversed the trend of reducing funds for emergency medical services and the emergency medical services community increasingly looked to the states-and not the federal government-for leadership. Local Governments: Targeting General Fiscal Assistance Reduces Fiscal Disparities (GAO/HRD-86-113, Jul. 24,1986) Washington, D.C. Retargeting general fiscal assistance would produce double the reduc- tion in disparities if only those communities with incomes below 125 percent of their states’ average income received assistance. Poorer com- munities must accept lower levels of public services or tax themselves more heavily to achieve equalization of services under the present pro- gram. GRS allocated funds to local governments within each state based on population, per capita income, and tax effort. Child Support: States’ Implementation of the 1984 Child Support Enforcement Amendments (GAO/HRD-86-40BR, Dec. 24, 1985) Washington, D.C. The Child Support Enforcement Program is a federally administered, state-run program established to require absent parents to support their children and, as a result, to reduce Aid to Families with Dependent Chil- dren (AFDC) program funding. In 1984, the Congress enacted amend- ments mandating states to adopt and implement 10 practices to improve the program’s ability to: (1) mandate proven collection techniques (2) ensure that services will be available to non-AFDC families, and (3) strengthen interstate child support enforcement. Page 63 GAO/HRJS90-34FederalState-Local Relations Bibliography Block Grants: Overview of Experiences to Date and Emerging Issues Apr. 3, 1986) Washington, D.C. (GAO~HRD-86-46, Block grant implementation proceeded relatively smoothly during the first 2 years because the states have prior administrative involvement in many of the programs included under the blocks. Continued availability of categorical grant funds, supplemental federal assistance, and discre- tion to transfer between the blocks, helped to offset reduced federal spending under the block grants. The states tended to seek program con- tinuity under the blocks. The states favored the block grant approach while interest groups favored the prior categorical approach. State Rather Than Federal Policies Provided the Framework for Manag- ing Block Grants (GAO~HRD-86-36, Mar. 15, 1986) Washington, DC. GAO found that block grants provided the states with greater discretion to plan and manage federal funds using existing state procedures. The states indicated that the broader discretion enabled them to better inte- grate related state and federal activities. As states gained experience, the need for additional federal technical assistance diminished. States Have Made Few Changes in Implementing the Alcohol, Drug Abuse, and Mental Health Services Block Grant (GAO/HRD-84-62, Jun. 6, 1984) Washington, D.C. GAO found that increased state funding and reallocated categorical grants were used by states to offset reduced federal appropriations for Alcohol, Drub Abuse, and Mental Health services. No states changed cli- ent eligibility policies, among those states we reviewed, and most contin- ued to fund the existing service provider network. States carried out their increased responsibilities by establishing program requirements, monitoring grantees, providing technical assistance, and auditing funds. Summary of Recent GAO Reports on Managing Intergovernmental Assis- tance Programs (GAOIGGD-82-91, Jul. 13, 1982) Washington, D.C. A major conclusion of GAO reports over the years has been that, since the federal government relies so heavily on state and local governments to implement national objectives on a partnership basis, the federal level needs to design programs that are more sensitive to the fiscal, legal, and administrative environments of state and local governments. Page 64 GAO/HRD-9034FederalState-Local Relations 1 . Bibliography Removing Tiering from the Revenue Sharing Formula Would Eliminate Payment Inequities to Local Governments (GAO/GGD-82-46, Apr. 16, 1982) Washington, DC. GAO found that revenue-sharing allocations to city and township govern- ments results from three sources: (1) the three formula elements of pop- ulation, relative income, and tax effort applicable to each unit of local government, (2) statutory formula constraints, and (3) the statutory tiering process. The effect is to distribute more aid to governments with more people having lower incomes and supporting a higher tax effort. But the tiering process also causes inequities by penalizing those govern- mental types with a higher concentration of low-income residents in states characterized by rural poverty. Eliminating tiering and directly applying the basic three-element formula to local governments would reduce inequities. (118829) Page 66 GAO/HRD90-34FederalState-Local Relations --- --I__-. 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Federal-State-Local Relations: Trends of the Past Decade and Emerging Issues
Published by the Government Accountability Office on 1990-03-22.
Below is a raw (and likely hideous) rendition of the original report. (PDF)