oversight

Communities in Fiscal Distress: State Grant Targeting Provides Limited Help

Published by the Government Accountability Office on 1990-04-13.

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

             United   States   General   Accounting   Office
             Report to the Chairman, Committee on
     GAO     Finance, U.S. Senate

!’

._


t ApriMl90
             COMMUNITIES IN
r            FISCAL DISTRESS
             State Grant Targeting
             Provides Limited Help
Human Resources Division

B-236433

April 13,199O

The Honorable Lloyd Bentsen
Chairman, Committee on Finance
United States Senate

Dear Mr. Chairman:

This report responds to your request that we assess whether states are meeting the needs of
fiscally distressed communities, particularly in light of the expiration of federal revenue-
sharing in 1986. We identified numerous state general fiscal assistance programs available to
fiscally distressed communities. In this report, we (1) examine the extent to which these
programs reduce differences in tax burdens among general purpose local governments in 48
states and (2) compare the success of these state programs with that of the old federal
revenue-sharing program in reducing differences in tax burdens between distressed and
better-off communities.

Copies of this report are being sent to other interested congressional committees and
members, as well as to national associations representing state and local governments. We
also will make copies available to other interested parties upon request.

Please contact me at (202) 275-1655 if you or your staff have any questions concerning this
report. Other major contributors to it are listed in appendix XIV.

Sincerely yours,




Linda G. Morra
Director, Intergovernmental   and
   Management Issues
                   ExecutiveSummery




                   The most direct means of reducing such disparities is by targeting state
                   and federal grant funds to fiscally distressed communities, thereby
                   reducing their tax burdens compared with “better-off” communities.
                   State and federal grant programs have the inherent flexibility to serve
                   such policy ends. Unrestricted general fiscal assistance grants are better
                   suited than special purpose grants to achieving disparity reduction
                   goals. Special purpose aid is aimed at satisfying specific public service
                   needs that may not correspond to where fiscal disparities are greatest.

                   This report focuses on how general fiscal assistance grants reduce dis-
                   parities among general purpose local governments. In performing its
                   analysis, GAOexamined data for 1986 (the last year of the federal reve-
                   nue-sharing program), conducted a SO-state telephone survey, and inter-
                   viewed state officials in 11 states. Because of data limitations, GAO did
                   not separately analyze the disparity-reducing effects of services pro-
                   vided directly by state governments, or local education and special pur-
                   pose aid to local governments.


                   State and federal grant programs reduce local financing burdens. How-
Results in Brief   ever, grants from both have decreased as a share of local revenues.
                   Between 1977 and 1987, state and federal aid dropped from 40 to 31
                   percent of local revenues. Reductions in state aid accounted for 2 points
                   of the 9 percentage point drop; an overall reduction in federal aid
                   accounted for the rest. As a result, local governments have had to
                   finance an increasing share of their expenditures from local resources.

                   At the same time, differences in per capita incomes widened between
                   poorer and more affluent counties. As the ability to bear tax burdens is
                   directly related to income, this suggests that fiscal disparities between
                   poorer and more affluent communities have increased.

                   In GAO’Sanalysis of 1985 data, disparities between fiscally distressed
                   communities, such as Starr County, Texas, and better-off communities
                   existed in all states. But the extent of disparities differed substantially
                   across states.

                   States provided $10.9 billion in general purpose fiscal assistance to local
                   governments in 1985” and federal revenue-sharing added another $4.6

                   ‘Weusedfiscalyear1985databecause    this wasthe latestlocalgovernment
                                                                                       tax dataavailablefor
                   our analysis.Analysisof morecurrentdataonstateprogramshouldyieldresultssimilarto those
                   presentedhere,asstatesinfrequentlychangethe formulasusedto distributethis aid.


                   Page3                            GAO/~90-69 StatesHelpCommunitiesin maxi DMXTSB
                          Executivesummary




Federal Revenue-Sharing   The amount of disparity reduction achieved depends on both how much
More Targeted to          funding is provided and the extent to which it is targeted to fiscally dis-
                          tressed local governments. Even though it had less than half the funding
Distressed Communities    of most state programs, the federal revenue-sharing program produced
                          a greater reduction. In 31 of the 48 states analyzed, federal revenue-
                          sharing reduced disparities more than did state programs because it was
                          more targeted to distressed communities (see p. 42).


                          GAOis making no recommendations.
Recommendations

                          GAOdid not solicit agency comments.
Agency Comments




                          Page6                                  StatesHelpC!ommunitie~
                                                      GAO/‘HRb9O89                   in &cal DI~trees
         contents




         Appendix V: General Fiscal Assistance Programs in                      66
             Minnesota
         Appendix VI: General Fiscal Assistance Programs in New                 69
             Jersey
         Appendix VII: General Fiscal Assistance Programs in New                76
             York
         Appendix VIII: General Fiscal Assistance Programs in                   81
             Rhode Island
         Appendix IX: General Fiscal Assistance Programs in                     82
             Tennessee
         Appendix X: General Fiscal Assistance Programs in Texas                86
         Appendix XI: General Fiscal Assistance Programs in                     87
             Vermont
         Appendix XII: General Fiscal Assistance Program in                     88
             Wisconsin
         Appendix XIII: State and Federal Intergovernmental Aid                 91
             to General Purpose Local Governments, by State
             (Fiscal Year 1985)
         Appendix XIV: Major Contributors to This Report                        93

Tables   Table 2.1: Share of Public Services Delivered by State                 23
             Governments, by State (Fiscal Year 1985)
         Table 2.2: Share of Local Public Services Financed by                  26
             State and Federal Grants, by State (Fiscal Year 1985)
         Table 2.3: States Ranked by Extent of Local Fiscal                     32
              Disparities, Assuming No State and Federal General
             Fiscal Assistance (Fiscal Year 1985)
         Table 3.1: State and Federal General Fiscal Assistance as              36
              a Percentage of Local Revenues, by State (Fiscal Year
              1985)
         Table 3.2: Reduction in Fiscal Disparities Attributable to             39
             Combined State and Federal General Fiscal
             Assistance, by State (Fiscal Year 1985)
         Table 3.3: Reduction in Fiscal Disparities in 16 States                42
              With the Widest Disparities (Ranked by Per Capita
              Funding) (Fiscal Year 1985)
         Table 3.4: Reduction in Fiscal Disparities Attributable to             43
              State and Federal General Fiscal Assistance, by State
              (Fiscal Year 1985)
         Table I. 1: Standard Deviation of Local Tax Burdens Per                62
              Dollar of Expenditures, Before and After Receipt of
              General Fiscal Assistance, by State (Fiscal Year 1985)



         Pagr 7                     GAO/llELNXM9StatesHelpCommunitiesin Pkd Distress
Page9   GAO/HRD9O89
                  StatesHelpCanmdties in Fkd Distress
                                       chapter 1
                                       introduction




Figure 1.1: Distdbutlon 01 Local
Qovernment Revenue Sources (1977-87)
                                       PWCWII




                                             1977      1660      1661      1662    1963        1964      1966      1666      1667
                                             Years


                                             L-l      Federal Grants
                                                      State Grants
                                             m        own-sourca Revenue

                                       Source U S. Bureau of the Census, Governmental     Finances, table 29 for 1985-1987. table 23 for 1980
                                       and 1982-84, and table 24 for 1977 and 1981


                                       increased because of the relative declines in the amount of state and
                                       federal aid to localities.


                                       Fiscal disparities-that   is, differing abilities to finance comparable local
Local Fiscal                           public services-are an inherent result of using a decentralized
Disparities: A Matter                  approach to providing public services. Such differences can lead to wide
of Public Concern                      variations in (1) the level of public services among localities with com-
                                       parable tax burdens or (2) tax burdens among localities providing com-
                                       parable service levels.

                                       Differences in tax burdens relative to services received raise equity con-
                                       cerns that ultimately must be answered through the political process:




                                        Page11                               GAO/HRLWM9StatesHelpC!ommunities
                                                                                                            in PiscalDistress
                        chapter1
                        Intmduction




                        this $4.6 billion program exacerbated disparities. At that time, we esti-
                        mated that the expiration of federal revenue-sharing could increase fis-
                        cal disparities among local governments on average by 10 to 15 percent.3


                        Several members of the Congress have proposed a less expensive and
Objectives, Scope,and   more targeted replacement for the general revenue-sharing program. To
Methodology             help assess the need for such a program, the Chairman of the Senate
                        Finance Committee asked us to examine the extent to which state and
                        federal assistance programs enable local governments to meet their pub-
                        lic service needs with comparable local tax burdens.

                        To do so, we developed the following objectives: (1) to assess the rela-
                        tive extent of local government fiscal disparities within each state, (2) to
                        identify state policies and strategies that affect the magnitude of these
                        disparities, and (3) to assess the extent to which state and federal gen-
                        eral fiscal assistance programs alleviated them in 1985, the year before
                        the expiration of federal revenue-sharing.

                        The uses of general fiscal assistance grants are unrestricted; local offi-
                        cials can use them to finance any of the services they provide. Because
                        of their unrestricted nature, general fiscal assistance programs easily
                        can be designed to reduce the gap between fiscally distressed and better-
                        off communities. Consequently, the programs represent a pool of
                        resources that could be used for this purpose. Some states have designed
                        their general fiscal assistance aid to reduce fiscal disparities but many
                        have not. Our analysis assesses the extent to which general fiscal assis-
                        tance programs reduce the gap between fiscally distressed and better-
                        off communities, whether or not they were intended to do so. While our
                        study analyzes the disparity reduction achieved on a state-by-state
                        basis, it does not assess reductions in disparities among local govern-
                        ments across states.

                        We conducted our review between October 1987 and March 1989 in
                        accordance with generally accepted government auditing standards. To
                        develop information on applicable policy issues and economic theory, we
                        did a literature search and reviewed GAO’Spast work in this area.




                        30urreport,LocalGovements:TargetingGeneralFiscalAssistanceReduces FiscalDisparities
                        (GAO/HRLMG-1131,   examinedfti disparitiesamonggeneralpurposelocalgovernmentsandthe
                        impactof federalrevenue-sharing
                                                      onreducingthosedisparities.


                        Page13                         GAO/HBD9989StatesHelpCommunitiesin FiscalDistress
                        Chapter1
                        Introduction




                      on state programs should yield results similar to those presented in this
                      report because states infrequently change the formulas used to dis-
                      tribute this aid.
                    l used per capita income, averaged over the years 198084, as a proxy for
                      local revenue-raising capacity. Income is a comprehensive measure of
                      residents’ “ability-to-pay,” widely used by analysts when measuring tax
                      burdens. We did not use the legal tax base from which local govern-
                      ments directly raise their revenues, because residents’ personal incomes
                      better measure ability-to-pay taxes than their property values.
                    l used the 1984 population as a proxy for public service needs among
                      local governments. Data required for more precise measures of public
                      service needs in every state does not exist. While many factors deter-
                      mine public service needs, most are associated with population size.
                    . did not attempt to reflect the varying costs of providing similar public
                      services in different localities. No consistent unit-cost data applicable to
                      local governments across the states exists.


Identifying State       To identify state policies and strategies to reduce fiscal disparities
Strategies              among local governments, we conducted a 50-state telephone survey. In
                        each state, we contacted senior staff members of the executive and legis-
                        lative branches to obtain a broad overview of how each state deals with
                        local fiscal disparities. State program descriptions and discussions of
                        state law in this report are based on information obtained from these
                        interviews and explanatory materials provided by these officials. We
                        also interviewed officials from the U.S. Bureau of the Census, National
                        Association of State Budget Officers, and the Advisory Commission on
                        Intergovernmental Relations.

                        In addition, to develop an in-depth understanding of their policies for
                        addressing fiscal disparities, we visited 11 states: California, Kansas,
                        Massachusetts, Minnesota, New Jersey, New York, Rhode Island, Ten-
                        nessee, Texas, Vermont, and Wisconsin. In selecting them, we balanced
                        differences in geographic location, population, and approaches to pro-
                        viding state general fiscal assistance.

                        Our field work enabled us to relate the results of our statistical analyses
                        of disparities to specific state strategies and policies that alleviate them
                        (see apps. II through XII).




                        Page16                      GAO/HlZD9069States,HelpCommunities
                                                                                     in FiscalDistis
                                            chapter 1
                                            Introduction




Figure 1.3: States Selected by GAO for Fieldwork



                                                                                        M  Minnesota
                                                                                       I \ Wisconsw
                                                           n                          _I h
                                                                               /A’ c       iv T’L
                                                                                                -
                                                                                                        New York
                                                                                                        Vermont
                                                                   ”   .
                                                                                      -’            -   Massachusetts
                                                                                                        Rhode Island


                                                                                                        New Jersey

                                                                                                        California

                                                                                                        KaflSaS


                                                                                                        Tennessee




           Fieldwork States




                                            Page17             GAO/HRD-9949
                                                                          StatesHelp Communitiesin &cd Distress
                       chapter 2
                       PlscnlDisparities:Their Nature,Sources,
                       andExtent




                       Two basic factors separate better-off communities from those that are
The Nature of Fiscal   fiscally disadvantaged:
Disparities
                       1. The tax burdens borne by local residents to finance public services
                       and

                       2. The level and quality of services these taxes finance.

                       Better-off   communities can finance relatively high levels of public ser-
                       vices with   relatively low tax burdens. But disadvantaged communities
                       must bear    relatively high tax burdens that can finance only relatively
                       low levels   of public services.

                       Two New Jersey cities, Woodbine and Alpine, illustrate an extreme
                       example of fiscal disparities (see fig. 2.1). In 1983, Woodbine had the
                       lowest per capita income ($5,013) of all New Jersey communities and
                       Alpine the highest ($39,004). With a tax burden equal to 1.7 percent of
                       its residents’ per capita income, Woodbine raised $83 per resident in
                        1985. In comparison, Alpine enjoyed a more favorable fiscal situation.
                       With a tax burden equal to 0.6 percent of its per capita income, it raised
                       $232 per resident. Thus, with a tax burden about one-third of Wood-
                       bine’s, Alpine raised almost three times as much revenue.




                       Page19                           GAO/HUB9989StatesHelpCommunitiesin PiscalDSsh-esa
                             Chapter2
                             FiscalDisparities:TheirNature,sources,
                             and Extent




                           statewide average can provide services at a lower effective tax rate
                           than relatively poor communities1
                         . The unit cost of providing public services. For example, the starting sal-
                           ary of a police officer in San Francisco, California was just over $29,000
                           in 1987 compared with about $16,000 for a similar position in Glen
                           County, California. Even allowing for its higher per capita income, San
                           Francisco must bear a higher per capita tax burden for each policeman
                           it hires per 1,000 residents than Glen County does.
                         l The level of public service needs among communities, resulting from dif-
                           ferences in geographic or socioeconomic conditions. For example, High-
                           land Park and Metuchen are two New Jersey communities with almost
                           equal populations. Yet, Metuchen has 132 miles of streets to maintain,
                           five times more than Highland Park. In 1985, Metuchen’s expenditures
                           for streets were $435,000 compared to $279,000 for Highland Park.

                             Local governments have limited ability to alter socioeconomic character-
                             istics that contribute to the rise of fiscal disparities, especially over the
                             short run. The value of tax bases, which are the sources of revenues to
                             pay for public services, depends largely on a community’s economic con-
                             dition and its prospects for employment and business opportunities.
                             Through economic development strategies, communities with relatively
                             low tax bases may augment their taxable resources. But even when suc-
                             cessful, these developments require years to reach fruition. Similarly,
                             unit costs of services, such as wages and salaries or office space and
                             land are largely influenced by remunerations available in the private
                             sector. Also, a community faced with relatively high public safety and
                             welfare service needs is ill-suited to alter the underlying causes of long-
                             term societal problems such as crime and poverty. Therefore, local gov-
                             ernments that are fiscally disadvantaged may require state and federal
                             government assistance in meeting their public service needs.


                             States differ significantly in the extent to which they centralize service
Centralizing Service         delivery. On average, state governments delivered just over half of all
Delivery Affects Local       noneducation public services in 1985, but there was significant varia-
Disparities                  tion. Some states, such as Vermont and Alaska, provided over three-
                             quarters of such services to their residents, while in Florida and
                             Nevada, the state provided less than 40 percent.


                             ‘Theuseof percapitaincomemeasures       mayoverstatethetrue tax burden.Somecommunities  are
                             ableto shift a substantialshareof their localtax burdento nonresidents
                                                                                                 by “exporting”taxes.For
                             example,Stratton,Vermont,is a majorski resort.In 1987,townresidentsownedonly 2 percentof the
                             taxablerealestatein thetown


                             Page21                            GAO/‘HRD9O-69
                                                                          StatesHelpCommunitiesin FiscalDistress
                                      Chapter 2
                                      Fiscal Disparities:   Their Nature,   Sources,
                                      and Extent




Table 2.1: Share of Public Services
Delivered by State Governments, by                           Percent of public                                            Percent of public
State (Fiscal Year 1965)                                    services delivered                                           services delivered
                                      State                           by state                 State                               by state
                                      Vermont                                   78.6           Nebraska                                     55.3
                                      Alaska         ___-              - ~_.__  754            Idaho                                        55.2
                                      Rhode Island                      _ -.__- 74.7           Missouri                                     55.2
                                      Marne                  _~         -~ --.__72.2           Oklahoma                                     54.9
                                      North Dakota                              71.3           Michigan                                     54.3
                                      West Virginra                             66.3
                                                                           .-__---             New Jersey                                   54.2
                                      Connectrcut __---~-~                 -- 66.1             Wyoming                                      52.6
                                      Massachusetts                             65.8
                                                                            ~-____.-           Mississippr                                  52.0
                                      South Dakota                              65.3
                                      Kentucky
                                      __-.-             --~-~          - ~. 63 3               U.S. Average’                                51.3
                                      Oregon          __-.                      62 4
                                      South Carolina                            61.6           Tennessee                                    50.6
                                      Maryland
                                      -__                                       61 4           Wisconsin                                    49.6
                                      PennsylvanIa                              60.0           Iowa                                         48.3
                                      New Hamoshrre                             59 8           Ohio                                         47.6
                                      Washington          __~~~        ~~ ~~~ 59 1             Texas                                        46.0
                                      Montana                                   59.1           Minnesota                                    45.6
                                      Alabama
                                       -.__--        __--                       59.0
                                                                           ~__~-__             Kansas     -                                 44.0
                                      Arkansas                                  58.9           Indiana                                      43.5
                                      New Mexico                                50.3           Colorado                                     42.2
                                      Utah                                      57 7           California                                   41 2
                                      lllrnois                                  57 2           New York                                     41 .I
                                      Loursrana                                 56.0           Florida                                      38.6
                                      Georgra                                   55.9           Arizona                                      38.6
                                      North
                                      .___ Carolrna                  .~ ~__.55.8               Nevada                                       38.0
                                      Virginia                                  55 5
                                      Source US. Bureau of the Census. Governmental Fmances, 1984-85.
                                      aWe calculated the U S average by welghtlng each state’s share of state-delwered    services by its
                                      respective population we


                                      Grants from states and the federal government can be classified into two
                                      groups:

                                      1. Categorical grants:’ support specific program activities ranging from
                                      very narrowly defined functions, such as medical care for low-income



                                                                       aidwhoseuseis restrictedto specificprogramareas,regardless
                                       ‘This mcludesall intergovernmental
                                       howbroad.Thisdefinitionwouldencompass blockgrants


                                       Page 23                                  GAO/HRLMO-S9   States Help Commuxdtie       in Fiscal Distress
                                            Chapter2
                                            FiscalDisparities:Their Nature,Sources,
                                            andExtent




Table 2.2: Share of Local Public Services
Financed by State and Federal Grants,       State                          Percent                      State                         Percent
by State (Fiscal Year 1985)                 Oklahoma                            64 4                    Oregon                             34.3
                                            South Carolina                      61 .l                   Alabama                            32.6
                                            Mississrppi                         60.7                    West Virginia                      30.0
                                            Arizona                       .~    56.4                    Pennsylvania                       29.9
                                            Wisconsm                            57 0                    Virginia                           29.7
                                            California ___~             ~-~~    56.2                    Washinoton                         29.0
                                            Arkansas                            48.2                    Connecticut                        27.9
                                                                             ~-~
                                            ldaho-                       -      47.8
                                                                              ____-__                   Kentucky                           23.8
                                            Michigan                            47.8                    New York                           23.7
                                            Nevada                              46.7
                                                                              ~__--                     Vermont                            23.7
                                            New Mexico                          46 1                    Rhode island                       23.0
                                            Minnesota                           43.8                    Texas                              22.1
                                            Louislana-                          43.3                    Montana                            21 .a
                                             Indiana                            42.3                    Alaska                             19.9
                                            Ohio       ~-___                    42.0                    New Hamoshire                      la.4
                                             Iowa                               39.8                    Maryland                           16.3
                                             Missouri                           38.6      -             North Carolina                     15.8
                                             North Dakota                       38.4
                                                                             ~__~-___                   Flonda                             15.2
                                             Tennessee                           38.3                   Kansas                             11.7
                                             Nebraska                           37.5                    Maine                              10.4
                                            Wyommg                               37.3                   Utah                                8.6
                                            Massachusetts
                                            -.___                                36.9                   Colorado                            a.5
                                            South Dakota
                                                     -~___                   ~-- 36.0
                                                                                  ___~_                 Georgia                             2.8
                                            New Jersey                           35.6         _____--
                                                                                                __~     Illinois                           35.4

                                            U.S. Averaae                        34.8
                                            Source: U S Census Bureau, “Revenue-Sharing Allocation File for Entitlement Period 17” and “Tax and
                                            Intergovernmental Aid File for Frscal Year 1984/R” (computer-based files). Local public services
                                            exclude public educatron. and grants exclude state and federal ard-to-education.

                                            Half of Tennessee’s highway aid is distributed equally among the coun-
                                            ties, 25 percent is distributed by land area, and the remaining 25 percent
                                            by population.

                                            Federal categorical aid usually is allocated by formulas, most often
                                            baaed on program costs or such usage factors as population or potential
                                            caseloads. In fact, few state or federal categorical programs allocate
                                            funds according to residents’ taxpaying ability.




                                            Page26                               GAO/‘HRD9O89
                                                                                            StatesHelpCommunitiesin PiscalDistress
                        Chapter  2
                        Fiscal Disparities:Their Nahm, Sow,
                        and Extent




                        share of the state’s total population, the other 35 percent according to
                        their percentage of the state’s total assessed tangible property. The
                        county government receives half of the county area’s allotment and the
                        remainder is divided among its municipalities according to their share of
                        the county’s population.

                        At the federal level, general revenue-sharing           was the major general fis-
                        cal assistance program that used a tax-baaed            targeting method to dis-
                        tribute aid. This program allocated funds on           the basis of the tax
                        burdens, per capita incomes, and populations             of local governments.


                        The way local geographical boundaries are set and the extent of local
Other State Policies    restrictions on revenue-raising can increase or decrease the extent of
Affecting the Extent    local fiscal disparities.
of Local Disparities

Boundaries Can Affect   Establishing geographic boundaries for local governments creates com-
                        munities with differing fiscal capacities if fiscal needs and resources are
Disparities             not evenly distributed. Although it is theoretically possible to draw com-
                        munity boundaries so each community has an equal ability to raise reve-
                        nue, in practice this has not been done. Giving local governments the
                        ability to adjust their political boundaries can affect the extent of fiscal
                        disparities, as illustrated by the situation in Texas,

                        Texas home rule cities” can unilaterally annex adjacent unincorporated
                        areas As the population of adjacent areas increases, home rule cities
                        have the option of annexation-with      or without the consent of the
                        neighboring communities. Thus, annexation allows central cities to
                        expand their tax bases while providing outlying areas with municipal
                        services such as water and sewer. Such policies long have been credited
                        with lessening the deterioration of central city tax bases caused by out-
                        migration in Texas.

                        While this policy has been successful in preventing the erosion of some
                        central cities’ tax bases, it has not completely solved the problem of
                        local fiscal disparities. For example, many poor unincorporated areas in
                        the state-particularly     near the border-have   grown in population but

                        ‘%e stateconstitutionof Texasallowsanycity with a populationover6,000to adopta homerule
                        charter.Homerule citieshavethepowerto doanythingtheywishthat is notspecificallyprohibited
                        by statelaw.Ofthe 1,121municipalitiesin Texas,217arehomerule cities.


                        Page27                           GAO/HRTMO89
                                                                   StatesHelpCommunitiesin FiscalIKstfese
Chapter2
Fiacd Disparities:Their Nature,So-,
andExtent




average resident tax burden per $100 of expenditures. Tax burdens are
local taxes as a percent of a county’s average personal income.

The dispersion in tax burdens for Florida counties is shown in figure 2.2.
The largest burden was in Union County, where residents pay taxes
equal to 1.94 percent of their income for each $100 of public services
they receive. In contrast, the lightest burden was in Palm Beach County,
where residents pay taxes equal to 0.69 percent of their income for each
$100 of public services they receive. Thus, the heaviest burden was
nearly three times the lightest.




 Page29                           GAO/IilfD90-99StatesHelpCommmitiesin FiscalDistress
                                                                         Chapter 2
                                                                         pisal ~H~parities:           Their Nature,    Sources,
                                                                         and Extent




Figure 2.3: Dispersion of County Tax Burden Per $100 Dollars of Public Services in 99 Iowa Counties (Fiscal Year 1985)

2.0   Tar Burden   Per $100 Dollars         01   Services
1.9
1.8

1.7

1.6

1.5

1.4
                                                         w       Decatur
1.3

                                                                                                                                                                        wm            m
1.2                                                          m                                                                                            n
      .C                                    I
                    n                            w                   8                           n     l wm                                                         m
1.1
                                                                                         l                             W.              w                                          m
       mm                   m               m                                                                               B
                                                     I                   n         n         I                 I                              mm               li            .            n
1.0

0.9
             l n+       n
                            u
                                -
                                m
                                    n
                                        n
                                                mm
                                                         m
                                                             mrnrn l
                                                                               +m mm.                mmm
                                                                                                         mm        l
                                                                                                                       m      l
                                                                                                                                  .+

                                                                                                                                  m        'mmm   n  ,mmmm
                                                                                                                                                                        I

                                                                                                                                                                                 mm Q H

0.8                                                                                                                                                                                           n
                                                                                                                                                      U-Polk

0.7

0.6




                                                                             Note The 99 counties are arrayed alphabetlcally           on the honzontal axis

                                                                           Source US. Bureau of the Census, ‘Revenue-Sharmg Allocatton File for Entitlement Period 17” and
                                                                            ‘Tax and Intergovernmental Ald iYe for Fwal Year 19@4/85” (computer-based files).


                                                                             For the 48 states in our analysis, we constructed an index of local fiscal
                                                                             disparities. The state in which local disparities were equal to the
                                                                             national average was assigned an index value of 100. Table 2.3 uses this
                                                                             index to rank the states. It shows that the potential range of fiscal dis-
                                                                             parities, in the absence of general fiscal assistance, is substantial. Ken-
                                                                             tucky’s fiscal disparities would have been three times greater than
                                                                             Nevada’s”
                                                                                                       -
                                                                             I ‘Wemeasured
                                                                                         localdisparitiesby thestandarddeviationin local tax burdens per dollarof services.
                                                                             Thestandarddeviationis a statisticalmeasure
                                                                                                                       of dispersionthat provides an empirical methodfor
                                                                             measuring
                                                                                     disparities.Seeapp I for a discussion
                                                                                                                         of why wechose thii measure of dispersion.


                                                                             Page 31                                        GAO/HRW3@69           States Help Gxnmunitie~         in Fbcal        Distress
Chapter2
FiscalDisparities:Their Nature,Sources,
andExtent




State                                                                                      Index no.
States with relatively small disparities:              ____
Connecticut                                                                                         07a
Minnesota                              --~______                                                    86
Ohio                                                                                                85
Nebraska                                                                                            El
California                                                                                          80
Washington                                                                                          80
Pennsylvania                                                                                        76
Montana                                                                                             74
Rhode Island                                                  _____                                 72
North Dakota                                                                                        72
Kansas                                                                                              70
Indiana                                                                                             67
Oregon                                       ____                             -                     61
Wyomlnq                                                                                             60
Iowa                                                                                                54
Nevada                                                                                              53
Note: See app I for the actual standard dewations and the methodology   used to calculate them

aA state wth dlspanties equal to the natlonal average would have an Index number of 100 We rounded
the Index numbers and grouped the states Into thirds to develop the three categories. New York’s Index
number was 87.1, while Connecticut’s was 87 0

Source U.S. Bureau of the Census. “Revenue-Sharing Allocahon File for Entitlement Period 17” and
“Tax and Intergovernmental Ald File for Fiscal Year 19&I/85” (computer-based files).


The extent of potential disparities-large    or small-is not systemati-
cally correlated with state population or geographic sizes. Some low-
population states such as Wyoming and Nevada would have a relatively
small range of disparities, while others such as Alaska and South
Dakota would have a wide range. Populous states such as Florida and
Texas would have large disparities, while California and Ohio would
not. Of the four geographically largest states, Alaska and Texas have
large disparities while California and Montana do not. However, there is
a regional pattern. Potential disparities are most prominent in the
Southwest (see fig. 2.4). They are less evident in the western and north-
ern Plains states. Despite these regional trends, neighboring states can
vary widely in the range of disparities, e.g., North Dakota and South
Dakota, New Jersey and Pennsylvania, and Utah and Nevada.




Page33                                GAO/HRD-906g
                                                 StatesHelp Communitiesin FiscalDi&ress
ChaDter 3

Federal Revenue-SharingReducedLocailFiscal
Disparities More Than Did Most State Programs

                                        In 1985, state general fiscal assistance to communities totaled $10.9 bil-
                                        lion and federal revenue-sharing added another $4.6 billion. Together,
                                        these programs comprised about 12 percent of total local revenues and
                                        reduced fiscal disparities among local governments by 18 percent. Ana-
                                        lyzed separately, state programs reduced disparities by about 9 percent
                                        and federal revenue-sharing by about 11 percent.’ Despite substantially
                                        more funding, most state programs reduced disparities less than did fed-
                                        eral revenue-sharing. If they were to target existing aid more specifi-
                                        cally to fiscally distressed localities, many states could further reduce
                                        disparities without additional funding.

                                        General purpose fiscal assistance, both state and federal, is an impor-
General Fiscal                          tant source of revenue for local governments. States provided $10.9 bil-
Assistance: An                          lion, or $47 per person, in fiscal year 1985, and the federal government
Important Local                         allocated $4.6 billion, or $19 per person. In 1985, state and federal gen-
                                        eral fiscal assistance comprised 12.3 percent of local government reve-
Revenue Source                          nues (see table 3.1). In 10 states, it accounted for more than 20 percent
                                        of revenues; in 17, less than 10 percent.

Table 3.1: State and Federal General
Fiscal Assistance as a Percentage of                                                           Percent of local revenues
Local Revenues, by State (Fiscal Year   State                                               Combined        State       Federal
1985)
                                        Nevada                                                       38.5      35.9             2.6
                                        New Jersey                                                   38.2      35.3             2.9
                                        Wisconsin                                                    32.8      29.2             3.7
                                        New Mexico                                                   31 9      27.2             4.7
                                        Mississippi                                                  31.1      22.8             8.3
                                        South Carolina                                               27.5      17.6            10.0
                                        Wyoming                                                      26.7      22.3             4.3
                                        Massachusetts                                              -26.1       22.4             3.7
                                        Arizona          -~~                                         25.3      22.3             3.0
                                        Minnesota                                                    22.7      19.6             3.1
                                        Mtchigan                                                    19.9        15.7            4.2
                                        West Virgbnla                                               186          4.0           14.6
                                        Arkansas                                                    18.4        9.0              9.5
                                        North Dakota                                                17.8       12.8              5.0
                                        Florida                                                     17.5       14.6              3.0
                                        Idaho                                                       16.5        8.9              7.7
                                        lndlana                                                     16 1       11.7              4.4
                                                                                                                        (continued)

                                        ‘Theoveralldisparityreductionfor generalfiscalassistance
                                                                                               programsis lessthanthedisparity
                                        reductionachievedby the state andfederalprogramsseparatelybecause, in somestates,stateand
                                        federalaidoffseteachother


                                        Page 36                          GAO/HIuT9069    States   HelpCk~nununitiea
                                                                                                                in FiscalDistress
                    chapter3
                    FederalRevenue-SharingReduced Local
                    FiscalDisparitiesMoreThanDid Most
                    state Frognuns




                    local revenue in 33 states. Within these states, state aid ranged from a
                    high of almost 36 percent of local revenues (in Nevada) to a low of 4.5
                    percent (in New York). In the 15 states where federal revenue-sharing
                    was greater than state aid, federal aid never exceeded 15 percent of
                    local revenues.

                    Funding levels for state general fiscal assistance programs varied con-
                    siderably by state for several reasons. In some cases, a high degree of
                    funding was related to a state’s concern about local public service needs.
                    For example, states with large general fiscal assistance programs such
                    as Minnesota and Wisconsin have programs aimed in part to reduce dis-
                    parities among their local governments. In other cases, it was an explicit
                    political choice to have small general assistance programs. For example,
                    Kentucky, Texas, and Utah provided very little aid, in part because they
                    have state constitutional provisions that prohibit general fiscal assis-
                    tance grants to local governments. And in other states, officials
                    expressed the view that ameliorating fiscal disparities was not a state
                    government responsibility, nor was it seen as an important policy issue.


                    Looking at disparity reduction from a national perspective, states with
Larger or Better-   the widest disparities (identified in table 2.3) would need to have larger
Targeted Aid        or more targeted general fiscal assistance programs compared with
Programs Would      states where disparities are smaller.Z
Red&e Fiscal        Five of the 16 states with the widest disparities, when measured with-
Disparities         out considering state and federal general fiscal assistance, had large pro-
                    grams. Funding, expressed as a percent of local revenues, substantially
                    exceeded the 8.7 percent national average. They were: New Jersey (35.3
                    percent), New Mexico (27.2 percent), Arizona (22.3 percent), Florida
                    (14.6 percent), and Alaska (12.6 percent). If these relatively highly
                    funded aid programs were more targeted to fiscally distressed local gov-
                    ernments, substantial disparity reductions could be achieved.

                    At the other extreme, general assistance provided 1 percent or less of
                    local revenues in 7 of the 16 states (Colorado, Oklahoma, Texas, Ver-
                    mont, Utah, Kentucky, and Missouri). These states cannot reduce dis-
                    parities by much, even with highly targeted programs, because of
                    relatively low funding.

                    ‘In general,increasingthefundingof existingstategeneralfiscalassistanceprogramswouldreduce
                    fiscaldisparities.However.if theincreasedfundingweredistributedamonglocalgovernments
                    according to eachlocalgovernment’s shareof statetaxescollected(return-to-originassistance),
                                                                                                             dis-
                    paritieswouldbeunaffected


                    Page37                            GAO/HRLMO49
                                                                StatesHelpCommunitiesin FiscalDistrem
                                             clmpter 3
                                             FederalRevenueSharingReducedLoeel
                                             FiscalDisparitiesMoreThanDid Most
                                             state programs




                                             average-income counties, After general fiscal assistance aid, Starr
                                             County’s fiscal disadvantage falls from $37.21 to $29.36, a Xl-percent
                                             reduction. Similarly, the income of the average resident in Robertson
                                             County was about 20 percent below Wheeler County’s average income
                                             and his/her fiscal disadvantage without general fiscal assistance would
                                             be $7.46. After general fiscal assistance aid, however, this disadvantage
                                             falls to $7.31, a 2-percent reduction. For local governments in all 254
                                             county areas in Texas, general fiscal assistance aid was distributed
                                             among county areas in a way that reduced these fiscal disadvantages by
                                             15.5 percent, on average, as shown in table 3.2.

Table 3.2: Reduction in Fiscal Disparities
Attributable to Combined State and                                                                      Disparity reduction
Federal General Fiscal Assistance, by                                                                   As a ercent of
State (Fiscal Year 1985)                                                                                   U.0 . average    Per capita
                                             State                                              Percent      (U.S.=1 W) general aid
                                             Nevada                        .--___                    54.1            302          $227
                                             South Carolina                                          39 7            219            57
                                             Arkansas                      _~-.                      36.1
                                                                                                      ___.           199            38
                                             West Virainia                                           34.4            190            29
                                             Maine                                                   32.6            180            48
                                             Arizona                _ ~~ _._~ ~~~                    32.5            180           146
                                             Louisiana                                               28.7            159            47
                                             Florida               --~~~                             27.5            152             90
                                             Tennessee                                               26.4            146             40
                                             Alabama
                                             -___                                                    26.1            144             37
                                             Rhode island                 -~ -.______                24.4
                                                                                                      ____.          135             52
                                             Iowa     ____             ~~~ .~                        24.1            133             63
                                             Mississippr                                             23.8            131             86
                                             New Jersev                                              23.2            128            133
                                             Minnesota                                               23.1            128            155
                                             South Dakota                                            22.7
                                                                                                     --              125           - 44
                                             Michigan
                                             _-                                                      22.5            124            100
                                             Illinois                                                22.1            122             52
                                             New     t-lampshrre
                                             ---_____.                     ~~                        21 2            117             41
                                             Nebraska                                                21.1            117             49
                                             Idaho                                                   20.7            114             41
                                             New Mexico                                              20.6            113             141
                                             Alaska
                                             -.____-~                                                20.4            112             264
                                             Vermont                                                 18.7            103              23
                                             Massachusetts                 ~~-      .____-   ____    18.5            102             147
                                             Georgia                                         ____-   16.4            102              22
                                                                                                                            (continued)




                                             Page39                               GAO/HRIHO89StatesHelpCommunitiesin FiscalDistress
                       Chapter3
                       FederalRevenu&haring ReducedLocal
                       FiscalDisparitiesMoreThanDid Most
                       state programs




                       In reducing fiscal disparities, the amount of general fiscal assistance aid
Targeting More         is less important than its targeting. The 10 states with the largest per
Important Than         capita assistance, as listed in table 3.2, reduced disparities about 25 per-
Funding in Reducing    cent, on average. However, this was not significantly different than the
                       10 states with the least per capita assistance, which reduced disparities
Fiscal Disparities     by about 14 percent, on average. While the states with high per capita
                       amounts of aid achieved 11 percent more disparity reduction, they aver-
                       aged almost eight times more assistance than that provided by states
                       with low amounts of per capita aid.”

                       Vermont and Georgia reduced disparities more than the national aver-
                       age with per capita assistance aid at about one-third the national aver-
                       age. These states could have accomplished such reductions only by
                       highly targeting their aid programs to their most fiscally distressed gov-
                       ernments. Such success demonstrates that improved targeting of state
                       aid programs can meaningfully reduce local disparities, even with rela-
                       tively few dollars.


                       Among the 16 states with the widest disparities shown in table 2.3,9
Disparity Reduction    had state programs that reduced disparities more than the national
Mixed in States With   average (see table 3.3). The programs in four states (Alaska, Arizona,
Widest Disparities     New Jersey, and New Mexico) reduced disparities more than the
                       national average because of their comparatively high funding levels.
                       General assistance grants in these states equaled or exceeded $120 per
                       capita-over    two-and-one half times the national average. Florida
                       achieved the largest reduction (21.8 percent) through a combination of
                       above-average funding ($75 per capita) and targeting to disadvantaged
                       communities. The four other states with above-average reductions
                       (South Dakota, Maine, Louisiana, and Tennessee) provided below-
                       average funding, ranging between $25 and $30 per capita, but had
                       better-than-average targeting to disadvantaged localities.




                       “Thecorrelationbetweenall states’percentage disparityreductionsandtheir percapitaassistant
                       wasa low .32.Thissignifiesa weakstatisticalrelationshipbetweenfundinglevelsandthesizeof
                       disparityreductions.


                       Page41                            GAO/HRD-SO.69
                                                                   StatesHelpCommunitiesb FiscalDistress
                                             chapter 3
                                             Federal Revenu&harlng     Reduced Lacal
                                             Fiscal Dlsparlties More Than Did Most
                                             state Proglam.9




                                             sharing in 17 states, only Arkansas had a program whose targeting
                                             effectiveness was superior to that of federal revenue-sharing. In a
                                             majority of the 31 states, federal revenue-sharing did better even
                                             though the per capita amount of its assistance was less (see table 3.4).

Tebte 3.4: Reduction in Fiscal Disparities
Attrtbutable to State and Federal General                                               State program             Federal revenue-sharing
Ftscal Assistance, by State (Fiscal Year                                             Disparity                       Disparity   Per capita
1985)                                                                               reduction      Per capita       reduction          grant
                                             States                                 (percent)           grant       (percent)     (percent)
                                             United States                                  8.0            $47            11.0           $19
                                             Federal revenue-sharing
                                             superior:
                                             West Virginia      __~~..                      (2.4)            6                37.3             23
                                             Mississiaoi,                                    1.4            63                24.1             23
                                             Maine                                          17.5            27                22.2             21
                                             Alabama
                                             --                                              5.5            18                21.6             19
                                             Idaho                                           4.8            22                18.8             19
                                             North Carolina                                 (0.5)           30                170              20
                                             Vermont                                         2.5             2                16.9             21
                                             Kentucky                             --(0.3)                     2               15.9              20
                                             Georaia                                         3.8              3               15.5              19
                                             Rhode island                                   11.8            31                15.2              21
                                             Texas                                           0.6             3                15.0              15
                                             Michigan                                       12.2            79                13.7              21
                                             New Mexico                                     12.4           120                13.3              21
                                             Wisconsin                                       6.6           175                13.0              22
                                             North Dakota                                    0.7            47                12.8              18
                                             Utah                                            1.3              1               12.4              22
                                             New Hampshire                                  11.9            29                12.3              12
                                             Pennsvlvania                                    0.9             3                12.1              18
                                             Missouri         __~~~~      ~---.              1.1             1                11.0              16
                                             Wyoming                                         9.5           159                10.9              31
                                             Oklahoma                                        3.3             3                10.2              17
                                             Maryland                                        5.6            33                10.0              20
                                             Kansas           __.~                           5.1            19                 9.0              16
                                             Ohro                                            8.1            36                 8.8              18
                                                                                                                                      (continued)




                                             Page 43                              GAO/lllUh9C59     States Help Communities      in Fiscal DWresa
                         Chapter 3
                         Federal RevenueSharing    Reduced Local
                         FiscalDisparitiesMore    ThanDid Most
                         state programs




                         in Kentucky, North Carolina, and Montana also were primarily return-
                         to-origin programs.

                         The main reasons that state general fiscal assistance programs generally
                         did not reduce local fiscal disparities as effectively as did federal reve-
                         nue-sharing were:

                         1. Most state programs were not designed to achieve disparity reduction
                         as was intended by the federal revenue-sharing program. This is espe-
                         cially true of state programs that distribute funds on a return-to-origin
                         or per capita basis.

                         2. General fiscal assistance programs may be poorly designed uninten-
                         tionally and thus not achieve the fiscal disparity reduction objectives
                         desired by state policymakers.


                         The expiration of federal revenue-sharing in October 1986 ended the
State Reaction to Loss   annual flow of $4.6 billion to local general purpose govermnents. The
of Federal Revenue-      most common state response was to do nothing. Other reactions included
Sharing Minimal          creating new general fiscal assistance programs, increasing local taxing
                         authority, and better targeting of funds. We identified 13 states, as of
                         1987, that had responded to the loss of general revenue-sharing. Their
                         responses varied. For example, Rhode Island and Delaware created new
                         general assistance programs. Massachusetts increased funding for its
                         major general fiscal assistance program. Connecticut officials cited the
                         termination of federal revenue-sharing as a contributing factor in the
                         expansion of existing general assistance programs and creation of a new
                         one. And New Jersey expanded one of its aid programs for its
                         municipalities.

                         Other states, such as Illinois and North Carolina, responded by increas-
                         ing the taxing authority of local governments. This left the decision to
                         replace revenue-sharing funds to the individual communities. However,
                         this approach will have little effect on fiscal disparities because it does
                         not increase the revenue-raising capacity of distressed communities
                         compared with those that are better-off.

                         Another approach was to increase the targeting of funds to distressed
                         communities, as Rhode Island did. In 1987, Rhode Island had seven sep
                         arate general fiscal assistance programs, each with its own distribution
                         formula. In 1988, the state eliminated these programs and created a new



                          Page 46                            GAO/HRD99+9   States Help Ciunmunities   in Fiscal Mstress
page 47
                      Appendix      I
                      Definition        and Measurement   of Local
                      Fiscal   Disparities




                      to bear to finance a “foundation” service level. One such foundation
                      level might be the state-wide average of local government expenditures,
                      or perhaps 25 percent or some other percentage of the state-wide aver-
                      age. A high tax burden needed to finance a foundation service level
                      would indicate a poor fiscal condition; a relatively low tax burden, a
                      good fiscal condition. Fiscal disparities then would be defined as differ-
                      ences in these tax burdens compared with the state-wide average of all
                      such tax burdens.

                      We chose the power-equalizing criterion because:

                       1. Unlike the foundation approach, an analyst need not make a value
                      judgment about what should be the foundation service level a state’s
                      general assistance program guarantees local governments.

                      2. The power-equalizing criterion explained the distribution of state gen-
                      eral assistance grants better than the foundation criterion in 9 of the 11
                      states included in our field visits.


                      If fiscal disparities are defined as tax burden differences per dollar of
Measuring the         services provided across communities, a summary statistic is needed to
Reduction in Fiscal   express these differences. From various statistical measures of disper-
Disparities           sion, including the range, interquartile range, and coefficient of varia-
                      tion, we chose the standard deviation.

                      Because the standard deviation averages differences between each
                      observation and the average value, it represents an absolute measure of
                      dispersion. This was more appropriate for our analysis because small
                      absolute differences in tax burdens are of no policy significance even if
                      relative differences are large. If grants finance a large share of local ser-
                      vices, local tax burdens will be small, and small tax burden differences
                      need not concern us. The standard deviation will measure the average
                      size of these differences.

                      In contrast, the coefficient of variation expresses the standard deviation
                      as a percent of the average value. It would indicate large relative differ-
                      ences in local tax burdens even though absolute differences were small.
                      This would lead to the conclusion that disparities were large even
                      though they were of little policy significance. The range and interquar-
                      tile range were rejected as summary statistics because they use only two
                      observations in measuring the dispersion in tax burdens per dollar of
                      public service benefits.


                       Page 49                                   GAO/HRD90.69   States Help Communities   in Fiscal Distress
Appendix I
Deflnltion  and Measurement   of Local
Fiscal Disparities




most influential observation deleted. After deleting the next most influ-
ential observation, we continued this process until the estimated dispar-
ity reduction stabilized (i.e., did not change substantially when
successive observations were deleted).

When analyzing state general assistance, we deleted observations only if
doing so resulted in showing a larger disparity reduction for the state
program. Thus, our analysis tends to overstate the disparity reduction
provided by state general assistance. We did this to show the state pro-
gram in the most favorable light. In the case of federal revenue-sharing,
we did the opposite, deleting influential observations only if they
reduced the amount of disparity reduction. This resulted in under-
estimating the disparity reduction achieved by the federal program and
ensured that our conclusion regarding the superior targeting of the fed-
eral program is a conservative one.

After completing our sensitivity analysis, we deleted no observations in
35 of the 48 states included in our analysis and no more than four in any
1 state. Thus, relatively few observations had to be deleted.

The results of our analysis are shown in table 1.1. The standard devia-
tion in tax burdens per dollar of services in the baseline (i.e., ult/e] =
a[l/y]) is shown in the first column of numbers. Column 2, which
expresses each state’s standard deviation as a percent of the U.S. aver-
age, represents the extent of fiscal disparities in each state compared
with the national average. These figures were reported in table 2.3
(ch. 2). The third column shows the standard deviation after the receipt
of general fiscal assistance aid. The fourth column, the percentage dis-
parity reduction (i.e., the percentage difference in standard deviations
with and without general assistance aid) that were reported in column 1
of table 3.2




Page 61                              GAO/-9989   States Help Commnnitie~   in Fiwal   %trese
                     Appendix I
                     Def¶nition and Measurement    of Local
                     Fiscal Disparities




                                                                                                                   Disparity
                                                                                      Index                       reduction
                     State                                           Before       (U.S.=lOO)       After           (percent)
                     South Dakota                                     0.196              148       0.152                 22.7
                     Tennessee                       .~- ~-           0.257              127       0.189                 26.4
                     Texas                                            0.259              128       0.219                 15.5
                     Utah                                             0.228              113       0.197                 13.6
                     Vermont                             ~____        0.272       --     134       0.221                 18.7
                     ~..
                     Virginia                                         0.225          .- 111        0.198                 12.2
                     Ghmaton                                          0.162               80       0.141                 12.7
                     West Virginia                                    0.216            -107        0.142                 34.4
                     Wisconsin                                        0.179       -.      88       0.151                 15.9
                     Wyoming                                          0.122            - 60        0.102                 16.6
                     Source: U.S Bureau of the Census, “Revenue-Shanng Allocation File for Entitlement Period 17” and
                     “Tax and Intergovernmental File for Fwal Year 1984/85” (computer-based flies).



                     Another possible approach was to analyze the reduction in fiscal dispar-
An Alternative       ities provided by state and federal general fiscal assistance grants net of
Approach Not Taken   the state and federal taxes used to finance them. We did not do this
                     because we could not identify the specific taxes used to finance these
                     programs and obtain the data on a county-by-county basis.

                     This “net fiscal incidence” analysis would produce different results,
                     depending on the progressivity of state taxes. For example, if the inci-
                     dence of state taxes used to finance state programs is more regressive
                     than those used to finance the federal program, our methodology would
                     understate the disparity reduction of the federal program compared
                     with state programs. If the reverse is true, that is, state taxes are more
                     progressive than federal taxes, our analysis would understate the dis-
                     parity reduction of state programs compared with the federal program.
                     Similarly, if the progressivity of state taxes is greater in one state than
                     another, this could alter the ranking of states in table 3.2, where they
                     are ranked by how much their general assistance programs reduced
                     disparities.




                     Page 53                                  GAO/HRDB@99     States Help Communities      in Fiscal Distress
                         Appendix II
                         General Piscal Aesi.9tance Progrllma
                         in caufomia




Funding Level            $76.6 million for state fiscal year 1986-87.


Revenue Source           30 percent of the 10 cent tax on each package of cigarettes.


Key Allocation Factors   Local sales taxes and population.


Formula                  Return to origin and per capita needs. The revenues first are split
                         between counties and cities according to their share of the local sales
                         tax. The funds allocated to counties are based solely on their share of
                         the local sales tax. Of the funds allocated to cities, 50 percent is distrib-
                         uted on the basis of population and the remaining 50 percent on the
                         basis of each city’s share of the local sales tax.



Mobile Home and
Commercial Coach
License Fee Program

Objective                To prevent revenue losses to local governments and school districts due
                         to the state’s administrative takeover of this program from the counties.


Funding Level            $13.6 million for state fiscal year 1986-87.


Revenue Source           An annual license fee on mobile homes and coaches equal to 2 percent of
                         their market value.


Key Allocation Factors   Market value of mobile homes and coaches.


Formula                  Return to origin. Funds are distributed to cities, counties, and school dis-
                         tricts according to the location of the mobile home or commercial coach
                         being taxed. Taxes on vehicles located within a city are split evenly
                         between the city, county, and school district. If the vehicle is located


                         Page 56                                GAO/HRD9949   States Help Commnnlties   in Fiscal Distress
                         Appendix U
                         General Fiscal Assistance   Pmgmw
                         in califomia




Funding Level            $338.9 million for state fiscal year 1986-87.


Revenue Source           State appropriation.

                                                     -.
Key Allocation Factors   Not applicable.


Formula                  Return to origin. Localities are fully reimbursed for the property tax
                         revenues lost by the exemption of a homeowner’s first $7,000 of
                         assessed valuation.



Open Space
Subventions Program

Objective                To partially compensate local governments for the property tax revenue
                         lost by assessing land on the value of its limited use (i.e., open space or
                         agricultural) rather than full market value.


Funding Level            $14.9 million in state fiscal year 1986-87.

                                                     --
Revenue Source           State appropriation.


Key Allocation Factors   Land acreage.


Formula                  Return to origin. Localities receive funds based on a partial reimburse-
                         ment for revenue lost under this program as follows:

Cities                   1. Prime agricultural land in cities with populations over 25,000 at
                         $8.OO/acre.

                         2. Prime agricultural land in cities with populations between 15,000 and
                         25,000 at $5.00/acre.



                         Page 67                             GAO/HUD-99-69   States Help cOmmunities   in Fiscal Distress
Appendix II
General Fkcal   AFd3tance   Programs
in callfonlia




2. $28.1 million on a proportional basis to the cost-of-living adjustment
to which counties would have been entitled for 1987-88 for certain
health programs if one had been provided.

3. $27.4 million on a basis proportional to the cost-of-living adjustment
counties would have received in 1987-88 for the Medically Indigent Ser-
vices, Community Services Block Grant, Aid to Families with Dependant
Children (Am),    Foster Care, and the Community Mental Health
Program.

4. $27.4 million according to a number of factors relating to county costs
for state-mandated programs.

For the second year of the program, funds are distributed as follows:
The state pays a portion of a county’s nonfederal share of costs for spec-
ified mandated programs (AFLXJ,Food Stamp Administration, Commu-
nity Health Services) that exceeds the percentage of the county’s
expenditures of general revenues for those programs in fiscal year
 1980-81.




page 59                                GAO/HRlMO89   States Help Cmnmunltiea   in Fiscal Mstress
                         Appendix Ill
                         General Fiscal Assistance   k%xQmms
                         inxanslw




Funding Level            $19.6 million for state fiscal year 1987.


Revenue Source           State appropriation equal to 3.5 percent of the state sales and use tax
                         credited to the State General Fund during the preceding calendar year.


Key Allocation Factors   Population and assessed valuation of real and personal property.


Formula                  Return to origin/per capita needs, as follows:

                         1. Funds first are distributed to county areas. Of this distribution, 65
                         percent is based on the county’s share of the state’s total population and
                         35 percent on the county’s share of the total assessed valuation of real
                         and personal property in the state.

                         2. The county government receives half of the funds allocated to the
                         county. The remaining 50 percent is divided among all cities within the
                         county according to population.



Private Club and
Drinking
Establishment
Liquor Tax Program

Objective                To share with local governments the tax revenue collected under this
                         program. Each local government must allocate one-third of the proceeds
                         to its general fund, one-third to its parks and recreation fund, and one-
                         third to a substance abuse fund.


Funding Level            $7.6 million for state fiscal year 1987.


Revenue Source           70 percent of the state’s 10 percent tax on alcoholic drinks served by
                         clubs, caterers, and drinking establishments.



                         Page 61                               GAO/lIRD9069   States Help Communities   in Pisal   Disiress
General Fiscal Assistance Programs
in Massachusetts

Additional Assistance
Program

Objectives               To equalize fiscal disparities between local governments, maintain the
                         ability of communities to provide essential services, and provide prop
                         erty tax relief.


Funding Level            $714.7 million for state fiscal year 1987 (July 1 to June 30).


Revenue Source           State appropriation.


Key Allocation Factors   Needs and fiscal capacity


Formula                  Tax base equalizing. Only increases in funding are allocated each year
                         by the formula below. Every community’s base level of funding is guar-
                         anteed to equal what it received the year before. Aid increases must be
                         at least 50 percent of the increase received the year before, but cannot
                         be more than 50 percent greater than that increase. Beginning in fiscal
                         year 1988, Boston’s aid is set by the legislature and not subject to the
                         formula. The basic formula is:

                         Need = cost of local services - local revenue capacity.

                         Massachusetts develops a cost index for every community within the
                         state. Starting with a statewide average cost of providing services, the
                         state adjusts each community’s cost up or down according to eight cost
                         factors:

                         1. Weighted full-time student population. Students with special needs,
                         and bilingual, vocational, and AFDCstudents receive extra weight in the
                         formula.

                         2. Population density.

                         3. Manufacturing   employment.



                         Page 63                     GAO/HlD9989   States Help Communities   in Fiscal Diatrees
Lottery Distribution
Program

Objective                To equalize fiscal disparities between local governments, maintain the
                         ability of communities to provide essential services, and provide prop-
                         erty tax relief.


Funding Level            $195.0 million for state fiscal year 1987.


Revenue Source           Funded by net receipts from the state lottery.


Key Allocation Factors   Property tax revenues and population.


Formula                  Tax base equalizing. The entitlement for each community is determined
                         by its population and property tax revenues as follows:

                         Population x 10 x revenues,

                         where revenues is the statewide average per capita equalized property
                         tax levy expressed as a percent of each community’s equalized
                         revenues.

                         This entitlement is adjusted by a coefficient to bring allocations calcu-
                         lated for each community in line with funds available:

                         Coefficient = funds available for distribution/ah       entitlements statewide.




                         Page 65                     GAO/IlltD9669   States Help Commnnitiw   in Fhcal   Distress
Homestead Credit
Program

Objective                To facilitate the ownership of family homes.


Funding Level            $598.0 million for fiscal year 1987.


Revenue Source           State appropriation.


Key Allocation Factors   Market value of homesteads.


Formula                  Return to origin. Local governments and school districts are reimbursed
                         by crediting 54 percent of the property tax payment on the first $68,000
                         of market value for each homestead within their jurisdiction. The maxi-
                         mum credit per homestead was capped at $700 for fiscal year 1987.



Taconite Homestead
Credit Program

Objective                To compensate homeowners in areas where taconite (low-grade iron ore)
                         production companies pay production taxes to the state as opposed to
                         local property taxes, from which they are exempt.


Funding Level            $11.2 million for state fiscal year 1987.


Revenue Source           State appropriation    of t,aconite production taxes.


Key Allocation Factors   Local property taxes



                         Page 67                       GAO/HUD-SW39   States Help Communities   in Fiscal Distress
Appendix VI

General Fiscal Assistance Programs in
New Jersey

Public Utilities
Franchise and Gross
Receipts Tax Program

Objective                To compensate local governments for the state preemption of taxation
                         of public utility property and to share with them the franchise fees paid
                         by public utilities.


Funding Level            $685 million for state fiscal year 1986.


RevenueSource            State appropriation   based on state taxes assessed on public utility
                         operations.


Key Allocation Factors   Value of utility property.


Formula                  Return to origin. Proceeds of this tax are distributed to municipalities
                         according to their share of the public utility’s scheduled property within
                         their jurisdiction. Maximum aid is limited to $700 per capita or 75 per-
                         cent of the aid received in 1979, whichever is greater.



Business Personal
Property Tax
Replacement Revenue
Program

Objective                To compensate municipalities for the elimination of the local property
                         tax on business personal property.


Funding Level            $158.7 million for state fiscal year 1986.




                         Page 69                      GAO/HEB90.69   States Help Communities   in Fkcal   Distress
                         Appendix VI
                         General Fiscal Assistance   Progrm   in
                         New Jersey




Bank Corporation
Business Tax
Distribution Program

Objective                To return to municipalities          25 percent of the taxes collected under this
                         program.


Funding Level            $16.2 million for state fiscal year 1986.


Revenue Source           State appropriation         equal to 25 percent of the bank corporation business
                         taxes collected.


Key Allocation Factors   Bank deposits


Formula                  Return to origin. Municipalities receive 25 percent of bank corporation
                         business taxes according to their share of total in-state deposits held by
                         banks in offices within their jurisdiction.



Financial Business
Tax Distribution
Program

Objective                To return to municipalities 25 percent of the taxes collected under this
                         program.


Funding Level            $1.6 million for fiscal year 1986.


Revenue Source           State appropriation         equal to 25 percent of the financial business taxes
                         collected.



                          Page 71                             GAO,‘HlDgO89   States Help cOmmdtiea   in lXsc.4 Distress
                         Appendix VI
                         General Fiscal Assistance   Programs   in
                         New Jersey




Revenue Source           State appropriation         from proceeds of the state income tax.


Key Allocation Factors   Population.


Formula                  Per capita needs. To be eligible, a municipality must have an effective
                         property tax rate exceeding $1 per $100 of valuation. Funds are allo-
                         cated to all eligible communities on a per capita basis.



Municipal Purposes
Tax Aid Program

Objective                To provide property tax relief.


Funding Level            $30.0 million for state fiscal year 1986.


Revenue Source           State appropriation funded by unapportioned proceeds from the public
                         utility franchise and gross receipts tax.


Key Allocation Factors   Population and equalized assessed valuation.


Formula                  Per capita needs/tax base equalizing. Municipalities may qualify for
                         funds from either of two separate allocations:

                         1. 23/27ths of the total allocation is distributed to eligible municipali-
                         ties; 50 percent is based on population and 50 percent on the extent to
                         which their per capita equalized assessed valuation is less than the state
                         average. To be eligible for funds from this distribution, a municipality
                         must have had a property tax rate equal to or greater than the state
                         average for the previous year and its per capita equalized assessed valu-
                         ation must be less than 90 percent of the state average.




                         Page 73                                GAO/HRD-99.69   States Help Chnmunities   in Fiscal Distress
                         Appendix VI
                         GenenllFisealAsslstan~ProgralMhl
                         New Jersey




Distressed
Municipalities
Program

Objective                To aid distressed municipalities (enacted starting fiscal year 1987).


Funding Level            $17.5 million for fiscal year 1987.


Revenue Source           State appropriation.


Key Allocation Factors   Need and fiscal capacity.


Formula                  Per capita needs. To be eligible, cities must qualify as distressed under
                         such criteria as high property tax rates, low equalized property values,
                         AFDCpopulation, and population. The Department of Community Affairs
                         distributes the funds to eligible cities as it sees fit. There is no specified
                         allocation formula.




                         Page 75                            GAO/HlKMS49   States Help Communities   in Nacd   Distress
                        AppendixvII
                        General Fiscal Assistance   Pmgram   in
                        NewYork




New York City           There is no special formula. New York City which encompasses five
                        counties, receives both the county and city allotment.



State-Local Revenue-
Sharing Program-
Special City, Town,
and Village Aid
Component

Objective               To provide special unrestricted aid to all general purpose    governments
                        in the state except counties and New York City.


Funding Level           $96.4 million in fiscal year 1987-88.


Revenue Source          State appropriation.


Key Allocation Factor   Population, fiscal capacity, and land area.


Formula                 Per capita needs/tax base equalizing. The allocation for towns and vil-
                        lages is baaed on land area, 1979 local revenues, 1980 Census popula-
                        tion, and 1980 full valuation of taxable real property. The allocation for
                        53 cities uses the 1970 Census population and 1979 full value real prop-
                        erty tax rates. The remaining eight cities receive specific amounts  as
                        cited in the legislation.



State-Local Revenue-
Sharing Program-
Excess Aid Component

Objective                To provide revenue for the general purposes of local   governments.




                         Page77
                              Appcmdix VU
                              General Fiscal Assistance   Program   in
                              New York




New York City                 The city receives 40 percent of the total allocation.

Cities, Towns, and Villages   The locality’s share (49 percent of the total) is based on its percentage of
                              the local revenues of all localities.



Emergency Financial
Assistance to Eligible
Municipalities

Objective                     To provide emergency financial aid to eligible localities in the state. Eli-
                              gible local governments are Erie County, Buffalo, Niagara Falls,
                              Yonkers, Rochester, and Syracuse.


Funding Level                 $36.2 million in fiscal year 1987-88.


Revenue Source                State appropriation.


Key Allocation Factor         Fiscal capacity


Formula                       Per capita needs. Eligible localities receive allocations as specified in
                              appropriation legislation.



Emergency Financial
Aid to Certain Cities

Objective                      To provide financial assistance to all cities with populations above
                                100,000 and below l,OOO,OOOthat have constitutional tax limits and/or
                               large amounts of tax-exempt property.


Funding Level                  $28 million in fiscal year 1987-88.



                               Page 79                               GAO/llElM989   States Help Conununities   in Firscal Distmes
Appendix VIII

General Fiscal Assistance Programs in
Rhode Islmd

                        Note: We have not described the seven general fiscal assistance pro-
                        grams that existed in Rhode Island for fiscal year 1987. Instead, we
                        have described the new state general revenue-sharing program that
                        replaced those seven programs in fiscal year 1988.



State General
Revenue-Sharing

Objective               To provide state aid to local governments.


Funding Level           $37.1 million in fiscal year 1987-88.


RevenueSource           State appropriation for state fiscal year 1987-88 equal to 6.1 percent of
                        the state’s combined sales and income tax receipts. Future year alloca-
                        tions are scheduled to increase by 5.5 percent.


Key Allocation Factor   Population, tax effort, and per capita income.


 ?ormula                The state used the federal revenue-sharing formula as the basis for the
                        new program’s distribution mechanism. The amount each municipality
                        received was based on:

                        Municipality’s population x tax effort x income f total state’s popula-
                        tion x tax effort x income

                        Regardless of the allocations generated by this formula, each municipal-
                        ity was guaranteed at least 10 percent more aid than it received from
                        the seven programs in fiscal year 1986-87.




                        Page 81                     GAO/HED&M9   States Help Communities   in Pimd   Mstmss
Formula                  Return to origin. Revenues are distributed to the city in which a tax-
                         payer resides. If a taxpayer resides outside the corporate limits of any
                         city, the funds revert to the county of residence.



Mixed Drink Tax
Program

Objective                To share tax revenue with cities and counties.



Funding Level            $10.0 million for state fiscal year 1986-87.


Revenue Source           50 percent of the 15percent tax on mixed drinks.



Key Allocation Factors   Property taxes paid.


Formula                  Return to origin. Half of the revenues earmarked for local distribution
                         are allocated between cities and counties according to their share of the
                         county property tax for schools. The remaining half is returned to the
                         city where the tax is collected. If the tax is collected in an unincorpo-
                         rated area, it goes to the county.



Alcoholic Beverage
Excise Tax

Objective                To share tax revenue with counties.


Funding Level            $5.9 million for state fiscal year 1986-87.




                          Page 83                     GAO/HltlHJM9   States Help c0mmunitie.a   in Piad   Dl~trew
                         AppendixIX
                         General F%3cal ARaietanfe    PrograIn
                         inTennessee




Funding Level            $4.2 million for state fiscal year 1986-87.


Revenue Source           97 percent of the severance tax on coal is earmarked for counties. One-
                         third of the severance tax on crude oil and natural gas production is
                         earmarked for counties.


Key Allocation Factors   Severance tax collections.


Formula                  Return to origin. Funds are distributed to counties where the tax was
                         collected.



TennesseeValley
Authority In Lieu of
Taxes Program

Objective                To compensate local governments for the difference between actual tax
                         losses resulting from the exemption of property owned by Tennessee
                         Valley Authority (TVA) and what local governments receive directly
                         from the TVA.


Funding Level            $39.8 million for state fiscal year 1986-87.


Revenue Source           Portion of the money received by the state from the   WA.




Key Allocation Factors   Assessed value of           TVA   property.


Formula                  Return to origin. The state determines what tax revenue local govern-
                         ments would have received if TVA property was taxable. Subtracting
                         what counties and cities receive directly from TVA, the state pays the
                         difference.



                         Page86
Appendix XI

General Fiscal Assisti3ncePrograms in Vermont


                  Vermont had no single general fiscal assistance program exceeding $1
                  million in fiscal year 1987. However, it has developed the Property Tax
                  Rebate Program to ensure that individual residents are not
                  overburdened by high property tax rates. The primary local revenue
                  source used to finance local services is the property tax. The community
                  imposes the necessary property tax rate to raise the revenue to pay for
                  its services. Vermont refunds to residents the property tax paid that
                  exceeds a set percentage of their household income. The percentage var-
                  ies with income as follows:

              l Under $4,000-3.5 percent.
              . $4,000-7,999-4.0   percent.
              l $8,000-l 1,999-4.5 percent.
              l $12,000 and over-5.0 percent.

                  The program is open to all Vermont residents, including both homeown-
                  ers and renters. For renters, the state considers 24 percent of the rent
                  paid as property taxes. In 1988, the state rebated almost $13 million to
                  Vermont residents for property taxes paid in 1987. Of this amount,
                  about $11 million went to households with incomes less than $20,000.

                  Vermont’s program ensures that no homeowner or renter pays property
                  taxes that exceed 5 percent of household income. A community may
                  impose a high tax rate, but the state will, in effect, pay that portion of
                  the tax rate that exceeds the applicable percentage of a resident’s
                  income. In addition, it provides property tax relief only to residents.
                  Nonresidents (who own 20 percent of the market value of the property
                  in the state), do not benefit from this program because the state restricts
                  eligibility to full-time Vermont residents.




                  Page 87                     GAO/HlDWf39   States Help Communities   in Fiscal Distress
                     Appendix XII
                     General Fiscal Assistance   Program
                     in Wisconsin




                     Counties receive aid under the same formula except that only 85 percent
                     of the 3-year average of local purpose revenues is used, as opposed to
                     100 percent.

                     3. Utilities. The annual payment of this component is designed to com-
                     pensate local governments for the cost incurred for providing services to
                     public utilities whose property is not subject to local taxation. The
                     amount of the payment is determined by the location of the public util-
                     ity property. If the property is located within a town, the town receives
                     a payment equal to a tax rate of $3 per $1,000 of book value and the
                     county payment is equal to a tax rate of $6 per $1,000 of book value. If
                     the property is located within a city or village, the county’s tax rate is
                     reduced to $3 per $1,000 of book value, while the city or village receives
                     a payment equal to a tax rate of $6 per $1,000 of book value. The maxi-
                     mum payment is limited to $300 per capita for a municipality and $100
                     per capita for a county. In 1987, $13.6 million was distributed under this
                     component.

                     4. Minimum/maximum payment, designed to ensure stability in the pro-
                     gram by preventing wide fluctuation of local aid payments in any
                     1 year. The minimum payment in any year may not be less than 95 per-
                     cent of the previous year. These minimum payments are funded by
                     establishing a maximum growth limit for each year. For 1987, this was
                     4 percent over what was received the previous year. In 1987, $14.3 mil-
                     lion was redistributed under this component.



State Property Tax
Credit Program

Objective            To provide property tax relief.


Funding Level        $146.7 million for the general government tax credit for state fiscal year
                     1987.


Revenue Source       State appropriation.




                     Page 89                               GAO/HRD9O49   States Help Communities   in Fiscal Distress
Appendix XIII

State and Federal Intergovernmental Aid to
General Purpose Lo& Governments, by State
(Fiscal Year 1985)
                Dollars in millions
                                                                Categorical aid     General assistance
                State                         Total aid      Dollars    Percent      Dollars   Percent
                United States                  $53.307       $37.999          71      $15.308               29

                Colorado                            595          521          88             73             12
                                      -...-
                Pennsylvania                     I ,778        1,519          85            259             15
                Virginia                            880          751          85            129             15
                New York                        10,325         8,760            a         1,564             15
                Washington                          794          655          83            139             18
                Californra                      10,622         8,651          81          1,971             19
                Missouri                            446          361            a             85            19
                Oklahoma                            317          251          79              67            21
                Kentucky                            371          289          78              82            22
                                        ..-
                Georgia                             558          432          77            126             23
                Utah                                168           129         77              38            23
                Maryland                            985          755          77            231             23
                Ohio                  _~         2,477         1,896          77            580             23
                Oregon                              502           383         76            120             24
                Montana                               91           69         76              22            24
                Vermont                               46           34         74              12            26
                Alaska                              518           379         73            139             27
                Texas                               926           640         69            286             31
                North Dakota                        144            99         69              45            31
                Iowa                                570           387         68            183             32
                Indiana                             963           649         67            314             33
                Kansas                              245           160         65              86            35
                Arkansas                            253           164         65              90             35
                Loursiana                           591           380         64            211             36
                Connecticut                         371           235         63             136            37
                Idaho                                112           71         63              41             37
                Alabama                             404           256         63             149             37
                Illinois                          1,627        1,027          63            600              37
                North Carolina                      825           520         63            305              37
                Michigan                          2,441         1,533         63            908              37
                Nebraska                             209          131         62              79             38
                Minnesota                         1,671         1,026         61            645              39
                Florida                           2,640         1,554         61            986              39
                Tennessee                            578          353         61            225              39
                Rhode Island          _~             107           58          54             50             46
                New Hamoshire                         86           46          54             40             46
                                                                                                   (continued)




                Page 91                        GAO/HRD8989      States Help Communities    in Pisd    Distress
&endix     XIV

Major Contributors to This Report


                        John M. Kamensky, Assistant Director, (202) 275-0653
Human Resources         Jerry C. Fastrup, Senior Economist
Division, Washington,   Charles C. Tuck, Assignment Manager
D.C.                    Gail C. Harris, Evaluator
                        Virginia T. Douglas, Reports Analyst


                        Frank E. Putallaz, Evaluator-in-Charge
New York Regional       RoJeanne Liu, Evaluator
Office                  Robert R. Poetta, Evaluator


                        Hector M. Castillo, Evaluator
San Francisco
Regional Office




(118820)                Page 93                     GAO/‘HRD!40-69   States Help Communities   in Fiscal D&tress
Appendix XIII
State and Federal Intergove-ntal       Ald to
General Purpme Local Gw-ents,          by State
(Fiscal Year lSS6)




                                                       Categorical aid        General assistance
State                                Total aid      Dollars    Percent         Dollars   Percent
Arizona                                    946           500            53          445              47
South Dakota                                64            33            52           31              46
Wyoming                                    197           101            51           97              49
Wisconsin                                1,666           930            50          936              50
Maine                                      107            51            48           56              52
West Virginia                              105            49            46           57              54
Mississippi                                383           158            41          225              59
South Carolina                             319           130            41          189              59
New Mexico                -.               332           132            40          200              60
Massachusetts                            1,361           520            38          853              62
Nevada                                     266            59            22          207              70
New Jersev                               1.202           206            17          996              63
Note: Total aid column does not necessarily sum to aid component columns due to rounding of categori-
cal and general fiscal assrstance amounts. Excludes Delaware and Hawaii. Does not include aid
received by county units of government in Connectcut. Maine, Massachusetts, New Hampshire, New
Jersey, Rhode Island. and Vermont, where our units of analysis are municipalities and towns
Source: U.S. Bureau of the Census, “Revenue-Sharing AllocatIon File for Entitlement Period 17” and
“Tax and Intergovernmental Aid File for Fiscal Year 1984/W (computer-based files).




Page 92                               GAO/HRDM89        States Help Communities     in F&al   Distress
                         Appendix XII
                         General Fiscal A.eslstance   Progrm
                         in wlscon.9ln




Key Allocation Factors   Property tax levy.


Formula                  Return to origin. This program is not open to counties. Municipalities
                         share in the distribution according to their share of the 3-year average
                         of the state’s total property tax levy for general government purposes.
                         This distribution is varied by a minimum/maximum funding adjustment.
                         No municipality may receive less than 90 percent of what it received the
                         year before. The maximum growth in a municipality’s allocation is
                         determined by the amount of aid left when the minimum payments have
                         been made.




                          Page 90                              GAO/HEBW9   States Help Commnnitles   in Pisal   Distress
Appendix XII

General l?isd Assistance Program in Wisconsin


Shared Revenue
Program

Objective                To (1) provide property tax relief, (2) equalize the fiscal capacity of
                         local governments, and (3) compensate localities for utility properties
                         not subject to local taxation.


Funding Level            $779.4 for state fiscal year 1986-87.


Revenue Source           State appropriation.


Key Allocation Factors   Population and assessed valuation.


Formula                  Per capita needs/tax base equalizing. This program distributes funds
                         based on four allocation components:

                         1. Population. This per capita payment ensures that every municipality
                         in the state will receive a payment. Counties receive no payment under
                         this component. The amount received for state fiscal year 1986-87 was
                         about $30.00 per cap&a; $142.7 million was distributed in 1987.

                         2. Aidable revenues, based on the fiscal capacity of local governments;
                         $623.1 million was distributed under this component in 1987. The
                         formula for municipalities is:

                         Aid = 3-year average of local purpose revenues x tax base weight.
                         (Local purpose revenues = local property tax levies plus certain other
                         local revenues.)

                         Tax base weight = 1 - equalized property value per capita/standard-
                         ized valuation per capita. The standardized valuation per capita is some-
                         what like a state-guaranteed tax base. It is set such that funds available
                         for distribution under this component exactly match aid entitlements.
                         For 1987, this was set at $32,800 per capita.




                         Page 88                     GAO/HRD9069   States Help Communities   in Fiscal Distress
Annendix X

General F’iscailAssistance Programs in Texas


Mixed Beverage Tax
Program

Objective                To share with local governments the taxes collected by the state under
                         this program.


Funding Level            $44.2 million for state fiscal year 1987.


Revenue Source           25 percent of the state’s 12-percent tax on the serving of mixed drinks is
                         earmarked for counties and cities.


Key Allocation Factors   Mixed drink sales.


Formula                  Return to origin. Of the tax collected under this program, 12.5 percent is
                         distributed to counties on the basis of where the tax revenue was gener-
                         ated. Another 12.5 percent is distributed to cities on the basis of where
                         the tax was generated.




                         Page 86                     GAO/lflllMW9    States Help Commdtie~   in I’%cal Diahmn
Revenue Source           17.5 percent of the state’s excise tax on alcohol is earmarked for
                         counties.


Key Allocation Factors   Population and land area.


Formula                  Per capita needs. 75 percent of the funds is distributed to counties
                         according to population. The remaining 25 percent is distributed to
                         counties according to their share of the state’s square mileage.



Beer Excise Tax
Programs

Objective                To share tax revenue with cities and counties.


Funding                  $2.6 million for state fiscal year 1986-87.


Revenue Source           10.05 percent of the state’s beer excise tax is earmarked for counties
                         and 10.05 percent for cities.


Key Allocation Factors   Population.


Formula                  Per capita needs. The county share is divided equally among each
                         county. The city share is distributed based on population.



Severance Tax
Programs

Objective                To share with counties the taxes collected under this program.




                         Page 84                     GAO/HltD9O89   States Help Communities   in Fiscal Distress
Appendix IX

General Fiscal Assistance Programs
in Tennessee

Mixed Beverage Tax
Program

Objective                 To share tax revenue with cities.


Funding Level             $92.7 million for state fiscal year 1986-87.


Revenue Source            4.6 percent of the state’s general sales tax is distributed to cities less a
                          portion for the University of Tennessee.


Key Allocation Factors    Population.


Formula                   Per capita needs. Distribution is based strictly on population.



Individual Income Tax
Program

Objective                 To share tax revenue with cities and counties.


Funding Level             $23.1 million for state fiscal year 1986-87.


Revenue Source            3/8ths of the state’s tax on individual’s dividend and interest income.


Key Allocations Factors   Income taxes paid by local residents.




                          Page 82                      GAO,TiBD9O89   State   Help Communities   In Fiscal Distrese
                        Appendix W
                        General Fiscal Assiitance   Program   in
                        New York




Revenue Source          State appropriation.


Key Allocation Factor   Eligibility determined by population, fiscal capacity, and value of tax-
                        exempt property.


Formula                 Return to origin/per capita needs. Eligible localities receive allocations
                        based on their tax losses sustained due to tax-exempt property. The
                        exception is Albany, which receives $2 million.




                        Page 80                               GAO/HRD9O-O9   States Help Commmitie~   in Fiscal Distress
                        Appendix VII
                        General Fiscal Assistance   Prognun   in
                        New York




Funding Level           $65.7 million in fiscal year 1987-88.


Revenue Source          State appropriation.


Key Allocation Factor   Population, fiscal capacity, and land area.


Formula                 Aid is 36.67 percent of the difference between the base year (1984-86)
                        and the projected year when comparing per capita revenue-sharing aid
                        summed with Special City, Town, Village Aid paid to all eligible munici-
                        palities. No excess aid is given when the difference is zero or less.



State-Local Revenue-
Sharing Program-
Needs-BasedAid

Objective                To provide revenue for the general purposes of local governments.


Funding Level            $70.0 million in fiscal year 1987-88.


Revenue Source           State appropriation.


Key Allocation Factor    Unemployment rates.


Formula                  Per capita needs, as follows:

Counties                 The county allocation (11 percent of total) is split into two separate
                         parts: One is based on a county’s share of the unemployed population of
                         all the counties, the second on a county’s share of all social services
                         reimbursements received by all the counties.



                         Page 78                               GAO/ISRJ%W9   State   Help Communities   in Fiscal Distress
Appendix VII

General F’iscalAssistance Program in New York


State-Local Revenue-
Sharing Per Capita
Aid Program

Objective                      To provide revenue for general purposes of local government.


Funding Level                  $800.7 million for fiscal year 1987-88.


Revenue Source                 State appropriation.


Key Allocation Factors         Population.


Formula                        Per capita needs/tax base equalizing. Fifty percent of the funds are dis-
                               tributed among all cities in existence as of April 1, 1968, on the basis of
                               population. The remaining 50 percent of the funds is distributed as
                               follows:

Towns                          $3.55 per capita.

Counties                       $.65 per capita when the average of per capita full value assessment
                               and personal income is $19,637 or more. An additional $.05 per capita
                               for each $245 this average falls below $19,637.

Cities                         $8.60 per capita when the average of per capita full value assessment
                               and personal income is $19,637 or more. An additional $.05 per capita
                               for each $245 this average falls below $19,637.

Villages                       $3.60 per capita when the average of per capita full value assessment
                               and personal income is $19,637 or more. An additional $.05 per capita
                               for each $245 this average falls below $19,637.

Population of Towns Residing   $2.05 per capita when the average of per capita full value assessment
Outside Villages               and personal income is $19,637 or more. An additional $.05 per capita
                               for each $245 this average falls below $19,637.




                               Page 76                     GAO/HRD9669   States Help Communities   in PiscaI Distress
                         Appendix VI
                         General Fiscal Assistance   Programa   in
                         New Jersey




                         2. If a municipality is not eligible for funds under that allocation, it can
                         receive funds from the second allocation, which distributes the remain-
                         ing 4/27ths of the funding. To be eligible, a community must have had a
                         tax rate (primarily, the property tax rate) in excess of 50 percent of the
                         state average and a per capita equalized assessed valuation less than
                         twice the state average. Funds then are distributed to eligible municipal-
                         ities on the same basis as under the first allocation.



Municipal (Urban) Aid
Program

Objective                To provide assistance to distressed communities.


Funding Level            $40.1 million for fiscal year 1986.


Revenue Source           State appropriation.


Key Allocation Factors   Population, needs, and assessed valuation.


Formula                  Per capita needs/tax base equalizing. Municipalities must qualify to
                         receive funding under this program. Eligibility criteria include minimum
                         population, high tax rate, low assessed valuation, and minimum number
                         of AFN children. Funds are distributed among qualifying municipalities
                         with 60 percent based on their share of AFDC children. Distribution of
                         the remaining 40 percent is based on population, tax rate, and tax base
                         data.




                         Page 74                                GAO/HlUM9-69   States Help Communities   in Fiscal Distress
                         Appendix VI
                         General Flcal.4s8istance   Program8   in
                         New Jersey




Key Allocation Factors   Financial business taxes.


Formula                  Return to origin. Municipalities receive 25 percent of the total financial
                         business tax generated within their jurisdiction.



Payment in Lieu of
Taxes, State Property
Program

Objective                To compensate for local services provided state-owned property.


Funding Level            $14.1 million for fiscal year 1986.


Revenue Source           State appropriation.


Key Allocation Factors   Assessed valuation of state property.


                                                                             .   .   ,.    =   -L-L..
                         Appendix Vl
                         General Flsd   Al3dst..¶nce Progralll.¶   in
                         New Jersey




Revenue Source           State appropriation.


Key Allocation Factors   Prior taxes on business personal property.


Formula                  Return to origin. Payment to municipalities is based on what annual tax
                         revenue they generated from this tax prior to its repeal in 1966, supple-
                         mented by additional state payments. Funding has been capped since
                         calendar year 1977.



Insurance Premiums
Tax Distribution
Program

Objective                To return to local governments the taxes collected under this program.


Funding Level            $20.2 million for state fiscal year 1986.


Revenue Source           State appropriation           funded by the state tax on insurance premiums.


Key Allocation Factors   Prior taxes on insurance premiums.


Formula                   Return to origin. Distribution to counties and municipalities equals the
                          amount received under former program increased by the annual per-
                          centage increase of all tax revenues under this program.




                          Page 70                                  GAO/HBD9089   States Help Communities   in Piscd Di8tmm
                         Appendix V
                         General Fiexd   Assistance   Prorpam~
                         in Minnesota




Formula                  Return to origin. After the homestead credit is applied to local tax bills,
                         local governments are reimbursed for 57 percent of the remaining prop-
                         erty tax rate up to a maximum credit of $465 or 66 percent up to a
                         maximum of $520. The use of 57 or 66 percent is based on such criteria
                         as the value of iron ore produced and the proximity of the homestead to
                         the mines.



Fiscal Disparities
Program

Objective                Allow all communities in the Minneapolis-St. Paul metropolitan area to
                         share in the benefits of the area’s economic growth.


Funding Level            $1.511 million for fiscal year 1987.


Revenue Source           40 percent of growth occurring in each metropolitan county’s commer-
                         cial/industrial property tax base.


Key Allocation Factors   Population and equalized value of local property.


Formula                  Tax base equalizing, calculated as follows:

                          Distribution index = city’s population x 2 x average fiscal capacity/
                          city’s fiscal capacity

                          Each city’s fiscal capacity is its equalized market value per capita.




                          Page68                                 GAO/HED4O49   States Help Communities   in Fiscal Distress
Appendix V

General Fiscal Assistaxe FVograms
in Minnesota

Local Government Aid
Program

Objective                To reduce the level of local property tax rates and to address disparities
                         between jurisdictions in tax effort and tax capacity.


Funding Level            $323.7 million for calendar year 1987.


Revenue Source           State appropriation.


Key Allocation Factors   Fiscal capacity and population.


Formula                  Tax base equalizing. There are separate allocation formulas for cities,
                         towns, and counties:

                         1. For cities, the fiscal need is estimated by averaging the sum of the
                         property tax levy and local government aid for the past 3 years. The
                         city’s fiscal capacity is then estimated by multiplying its property tax
                         rate by its adjusted assessed valuation and the result subtracted from
                         the city’s fiscal need. This is the city’s preliminary aid figure. Sub-
                         tracting the aid received the previous year establishes the increase nec-
                         essary to meet the city’s fiscal need completely. This figure is adjusted
                         by the appropriation limit set by the state. This figure is compared with
                         maximum aid figures determined by per capita aid amounts. The lesser
                         of the two figures becomes the aid received by the city less the state’s
                         costs for developing demographic data.

                         2. For towns to receive aid, they must have a property tax rate equal to
                         or more than $1 per $1,000 of assessed valuation. They then receive a
                         4-percent increase over the greater of 60 percent of all aid received in
                         1983 or 100 percent of the local government aid received in the previous
                         year. This is the aid received less the state’s costs for developing demo-
                         graphic data.

                         3. Counties receive a 4-percent increase over the aid received in fiscal
                         year 1986 less the state’s costs for developing demographic data.


                         Page 66                     GAO/HRBW9    States Help Communities   in Pisal   Distress
Appendix IV
General Fiscal Asdtsnce   Pro@vuns
in Massachusetts




4. Service and trade employment.

5. Road mileage.

6. Pre-1940 housing stock.

7. Population below the poverty level.

8. Service level. This variable reflects the different service levels
between communities. It is designed to recognize that in small, rural
communities, residents privately arrange services such as water and
sewer that are provided by governments in larger communities. The
state then develops the revenue capacity of each community according
to five factors. These are:

1. Property tax capacity.

2. Motor vehicle excise collections.

3. State aid from the previous year.

4. Local reserve. This can be a surplus or shortfall. It equals (net free
cash + overlay surplus) - (reserve cushion equal to 2.5 percent of
spending or $100,000, whichever is greatest).

5. Hotel/motel tax capacity.

The need of each community is determined by subtracting revenue
capacity from the state’s cost calculation. Communities with negative
need have their need set at zero. Since the increase in state aid will not
meet the total statewide need determined, need is reduced by the per-
centage of the statewide need that the increase does meet. This results
in the covered need for each community. It is adjusted to ensure that no
community receives 50 percent more or less than last year’s increase in
aid.




 Page 64                             GAO/HRIMW39   States Help Communities   in Fiscal Distress
Key Allocation Factors   Tax revenues from alcoholic drink sales.


Formula                  Return to origin. Proceeds are distributed to the source of the revenues.
                         Counties receive only the tax collected in unincorporated areas. Cities
                         receive the tax collected within their jurisdictions.



SeveranceTax
Program

Objective                To share with local governments the severance tax on crude oil, gas, and
                         coal collected under this program.


Funding Level            $4.4 million for fiscal year 1987.


Revenue Source           7 percent of the revenue raised by the state’s severance tax.


Key Allocation Factors   Severance tax revenues.


Formula                  Return to origin. Counties receive funds equal to 7 percent of the state
                         severance tax collected within their jurisdiction. Counties retain 50 per-
                         cent of these funds, with the remaining 50 percent going to school dis-
                         tricts within their boundaries.




                         Page 62
Appendix III

General F’iscailAssistanee Progmms in Kansas


Local Ad Valorem Tax
Reduction Fund
Program

Objective                To reduce property tax levies.


Funding Level            $26.9 million for state fiscal year 1987.


Revenue Source           State appropriation equal to 4.5 percent of the state sales and use tax
                         credited to the State General Fund during the preceding calendar year.


Key Allocation Factors   Population and assessed valuation of real and personal property.


Formula                  Return to origin/per capita needs, as follows:

                         1. Funds first are distributed to county areas. Of this distribution, 65
                         percent is based on the county’s share of the state’s total population, the
                         remaining 35 percent on the county’s share of the total assessed valua-
                         tion of real and personal property in the state.

                         2. Each county’s allocation is divided among all property tax-levying
                         subdivisions except school districts according to their share of the total
                         property tax levy in the prior year. The county government is included
                         in this distribution.

                                              -

County-City Revenue-
Sharing Fund Program

Objective                To compensate local governments for the elimination of their participa-
                         tion in the cigarette, liquor enforcement, and domestic insurance compa-
                         nies privilege taxes.




                         Page 60                     GAO/HRD.9089    States   HelpCommunities
                                                                                            in FiscalMstresa
                         Appendix n
                         General Fleeal Assistance   ProgralM
                         in California




                         3. Prime agricultural         land in all other cities at l.OO/acre.

                         4. All other open space at $.4O/acre.

counties                 1. Prime agricultural land within 3 miles of cities with populations over
                         25,000 at $8.00/acre.

                         2. Prime agricultural land within 3 miles of cities with populations
                         between 15,000 and 25,000 at $S.OO/acre.

                         3. All other prime agricultural land at $l.OO/acre

                         4. All other open space at $.4O/acre.



County Revenue
Stabilization Program

Objective                To help compensate counties for the rising cost of state-mandated pro-
                         grams (enacted for fiscal year 1987-88).


Funding Level            First-year allocation was $110.3 million for state fiscal year 1987-88.
                         Subsequent allocation is estimated to be $15.3 million for state fiscal
                         year 1988-89.


Revenue Source           State appropriation.


Key Allocation Factors   Population and needs ( 1987-88), needs (1988-89).


Formula                  Per capita needs. For the first year of the program, funds were distrib-
                         uted as follows:

                          1. $27.4 million to counties according to population.




                         Page 68                                GAO/IUUWO59   States   HelpCommunities
                                                                                                     in FiscalDistress
                         outside a city, the funds are split evenly between the county and school
                         district.



Special Supplemental
Subventions Program

Objective                To compensate cities for the revenue loss experienced due to the repeal
                         of the tax on personal property.


Funding Level            $56.9 million for state fiscal year 1986-87.


Revenue Source           State appropriation

                                               -~
Key Allocation Factors   Personal property tax collections.


Formula                  Return to origin. Funds are distributed to cities according to their share
                         of the revenue loss sustained due to the repeal of the tax on personal
                         property.

                         In 1984-85, cities received 50 percent of the aid received in 1983-84.
                         This percentage has declined by 10 percent each year; funding is to be
                         terminated by 1989-90.

                                               -

Homeowners’
Property Tax Relief
Program

Objective                To compensate local governments for the revenues lost due to the home-
                         owner’s exemption equal to the first $7,000 of assessed valuation.




                         Page 56                     GAO/HRIMM9   States Help Communities   in Fiscal Distress
Appendix II

General Fiscal Assistance Programs
in California

Motor Vehicle License
Fee Program

Objective                To prevent revenue losses to local governments due to the state’s
                         assumption of the personal property tax on motor vehicles.


Funding Level            $1,547 million for state fiscal year 1986-87.


Revenue Source           An annual license fee on motor vehicles equal to 2 percent of their mar-
                         ket value.


Key Allocation Factors   Population.


Formula                  Per capita needs. Program revenues are allocated as follows:

                         1.40.625 percent to counties on the basis of population.

                         2. 40.625 percent to cities on the basis of population.

                         3. 18.75 percent, primarily to counties according to their population and
                         share of revenues from a tax on business inventories prior to its repeal.
                         Cities that did not levy a property tax prior to Proposition 131 received a
                         portion of the 18.75 percent. This distribution to cities was repealed
                         beginning in fiscal year 1988-89.



Cigarette Tax Program

Objective                To offset revenue losses by local governments when the state preempted
                         the right to tax cigarettes.



                         ‘Proposition13wasthe voterinitiativethat limit&dlocalpropertytaxesto 1 percentof Bgqegged
                         valuation.


                         Page64                           GAO/HELM089StatesHelpC~nu~~unlti~in Fksl Dbtrea.8
                                          Appendix I
                                          Defhition   and Measurement   of Local
                                          Fiscal Disparities




Table 1.1:Standard Deviation of Local
Tax Burdens Per Dollar of Expenditures,                                                                                            Disparity
Before and After Receipt of General                                                                       index                   reduction
Fiscal Assistance, by &ate (Fiscal Year   State                                        Before        (U.S.=lOO)       After        (percent)
1985)                                     Alabama                                       0.196                 94        0.145            26.1
                                          Alaska                                         0.270               133        0.215            20.3
                                          Arizona                                        0.183               116        0.124            32.3
                                          Arkansas                                       0.204               101        0.130            36.1
                                          California                                     0.163                80        0.137            15.8
                                          Colorado                                       0 230               113     ..-0.208             9.5
                                          Connecticut                                    0.176                87        0.150            15.1
                                          Florida                                        0.295               146        0.214            27.5
                                          Georgia                                        0.206               102        0.168            18.4
                                          idaho                                          0 191                96        0.152            20.7
                                          lllrnois                                       0 195                96        0.152            22.1
                                          lndrana                                        0.137                67        0.121            11.5
                                          Iowa                                           0.109                54        0 083            241
                                          Kansas                                         0 142                70       0 123             13.2
                                          Kentucky                                       0.322               159       0.271             15.7
                                          Louislana                                      0.268               132       0 191             28.7
                                          Maine                                          0.311               153       0.209             32.6
                                          Maryland                                       0.168                93       0 161             14.6
                                          Massachusetts                                  0.206           -   102       0 168             18.5
                                          Mrchiaar ”                                     0.193                95       0.150             22.5
                                          Minnesota                                      0.175                86       0 135             23.1
                                          Mrssissipp                                     0.208               105       0 158             23.8
                                          Mrssourr                                       0.243               120      .0214              12.0
                                          Montana                                        0.149                74       0.141              5.3
                                          Nebraska                                       0.164                81       0.130             21.1
                                          Nevada                                         0.107                53       0.048             54.7
                                          New Hampshire                                  0.215               106       0.170             21.2
                                          New Jersey                                     0.249      --       123       0.191             23.2
                                          New Mexico                                     6.265               156       0.211             20 4
                                          New York                                       0.177                87     0.164                 7.0
                                          North Carolrna                                 0.194                96     0.166                14.7
                                          North Dakota                                   0.995                72 -- 0.091                  8.1
                                          Ohio                                           0.171                85     0.145                15.6
                                          Oklahoma                                       0.251               124    -0.219                12.9
                                          Oregon                                         0 123                61     0.104                15.7
                                          Pennsylvania                                   0.154                76     0 134                127
                                          Rhode Island                                   0 151                72     0.114               24.3
                                          South Carolina                                 0.212               106     0.128               39.7
                                                                                                                                 (continued)




                                          Page 62                              GAO/HRD-99-69     States Help Communities   in Fiscal Distress
                       Appendix I
                       Deflnltion  and Measurement   of Local
                       Fiscal Disparities




                       To measure the effect of general fiscal assistance grants on fiscal dispar-
                       ities, we compared the dispersion in local tax burdens per dollar of ser-
                       vice benefits with and without the receipt of general assistance grants.
                       If tax burdens are represented by t (per capita taxes paid by residents,
                       r, as a percent of residents per capita income, y) and public service bene-
                       fits by e (per capita expenditures), the tax burden per dollar of services
                       can be expressed as the t/e. The standard deviation in t/e ratios is repre-
                       sented by u(t/e). The percent reduction in fiscal disparities is simply the
                       percent change in this standard deviation with and without general fis-
                       cal assistance grants.

                       To calculate the reduction in fiscal disparities, we first defined a base-
                       line t/e ratio by assuming that local governments finance all services
                       from local revenue sources. Using this assumption, per capita own-
                       source revenues are set equal to per capita expenditures (i.e., r = e,
                       where r is per capita local revenues). The baseline ratio t/e is then equal
                       to [(r/y)/r], or l/y. In the absence of general assistance aid, this result
                       implies that the baseline measure of fiscal disparities is 41/y).

                       Fiscal disparity after the receipt of grants is represented by a(t/e),
                       where “t,” the tax burden, is defined as [(r-g>/y], where g is the per cap-
                       ita grant whose effect is being assessed. If the distribution of grants is
                       disparity-reducing, then by definition the dispersion in t/e ratios would
                       be reduced compared to the baseline case. In fact, if grants were
                       targeted to completely eliminate disparities in fiscal condition, postgrant
                       t/e ratios would be completely equalized and u(t/e> would be equal to
                       zero.


                       We examined data on local tax burdens and per capita expenditures in
Sensitivity Analysis   each of the 48 states included in our analysis. In some instances, the
Performed              receipt of general assistance aid dramatically changed the t/e ratio for
                       one or a few individual counties within a state. Because the standard
                       deviation can be heavily influenced by extreme values, we did a sensi-
                       tivity analysis, redoing the analysis with and without potentially influ-
                       ential observations.

                       In performing the sensitivity analysis, we ranked all observations by the
                       change in their t/e ratio with and without grants. We then calculated the
                       percent reduction in a(t/e) compared with the baseline, a( l/y), with the




                       Page 60                              GAO/HRB9O49   States Help Communities   in l+ca~   D%J-WS
Appendix I

Definition and Measurement of Local
Fiscal Disparities

                     In this appendix, we discuss in more detail our approach to measuring
                     the reduction in local fiscal disparities. We elaborate on the conceptual
                     and methodological issues related to measuring fiscal disparities and the
                     effectiveness of general assistance aid in reducing them. After present-
                     ing two definitions of fiscal disparities, we explain why we selected one.
                     Additionally, we explain why we chose the standard deviation statistic
                     to measure how much disparities are reduced by state and federal gen-
                     eral assistance aid. Finally, we describe the sensitivity analysis we per-
                     formed to assure that any bias in our analysis is in the direction of
                     showing superior state targeting.


                     For this report, we use the so-called “power-equalizing” criterion to
Fiscal Disparities   define fiscal disparities among general purpose local governments. In
Defined              the objectives, scope, and methodology section of chapter 1, we first
                     defined the fiscal condition of local governments within each county as
                     the ratio of residents’ local tax burdens to their public service expendi-
                     tures. Tax burden was defined as local taxes paid, expressed as a per-
                     centage of residents’ personal income, and public service expenditures
                     were used to approximate the public service benefits provided by a local
                     government.

                     By our definition, local governments with relatively high tax burdens
                     per dollar of expenditures have a relatively poor fiscal condition. Con-
                     versely, low tax burdens per dollar of expenditures denote a relatively
                     good fiscal condition. For our analysis, we define fiscal disparities as
                     differences in fiscal condition among local governments. In addition, we
                     aggregated local government expenditures up to the county level.’ Thus,
                     measurement of disparities was baaed on county averages. In this
                     report, we refer to governments with a poor fiscal condition as “fiscally
                     distressed” and governments in good fiscal condition as “better-off”
                     communities.

                     This criterion-equalization  of average tax burdens per dollar of local
                     government expenditures-also     is known in the public finance litera-
                     ture as a power-equalizing or a percentage-equalizing program. It is one
                     of two criteria commonly used in designing grant programs aimed at
                     reducing fiscal disparities.

                     An alternative definition of fiscal disparity-used in foundation grant
                     programs-is the difference in tax burdens local residents would have

                     ‘Seefn.7,ch.1


                     Page 48                     GAO/HBD99-09   States Help Communities   in Fiend Distress
             Chapter3
             FederalBevenueShariugReducedLocal
             FiscalDisparitiesMoreThanDid Most
             state Pmgrztms




             general fiscal assistance program, in part to help localities offset their
             loss of federal revenue-sharing funds.

             The state decided to use the federal revenue-sharing distribution
             formula to allocate all funds in its new program. In 1986, before the
             change in formula, Rhode Island’s general assistance programs reduced
             disparities by 11.8 percent. Federal revenue-sharing, being more
             targeted to disadvantaged local governments, contributed a 15.2-percent
             reduction (see table 3.4). By adopting the revenue-sharing formula in
              1988 to allocate all its general assistance aid, we estimate that Rhode
             Island will reduce disparities by 25.1 percent. Thus, Rhode Island, by
             replacing its old formula with the more targeted federal formula, will
             substantially reduce disparities.


             The degree to which general fiscal assistance aid is targeted to fiscally
Conclusion   distressed communities is the factor most responsible for the disparity
             reductions achieved by state and federal programs. In 1986, state pro-
             grams provided more than twice the funding provided by federal reve-
             nue-sharing. However, they did not reduce disparities as much as the
             federal program because they were not as targeted to distressed commu-
             nities as was the federal program, nor in most cases were they intended
             to be. If states were to target more of this aid to distressed local govern-
             ments, they could further reduce the differences in tax burdens between
             distressed and better-off communities without additional funding.




             Page46                       GAO/HRD46439
                                                    StatesHelpCommunitleain FincalDistress
Chapter3
FederalRevenueSharingReducedLocal
Fiscal DlsparltiesMoreThanDid Most
state Programs




                                              State program                  Federal revenue-sharing
                                           Disparity                            Disparity   Per capita
                                          reduction      Per capita            reduction
States                                     (percent)          grant            (percent)      (per!Ei;
Colorado                                          0.9              6                    0.7                 17
Indiana                                            3.9                42                8.6                 16
Oregon                                             8.5                24                8.6                 20
Washington                                         5.0                15                7.9                 17
Virginia                                           4.7                 5                7.8                 17
Montana                                           (0 3)                4                6.1                 23
New York                                           23                 62                5.0                 26
State fiscal assistance
superior:
Nevada                                            52 0               212               10.0                 16
South Carolma                                     27.2                37               23.3                 21
Arkansas                                          25.6                19               15.9                 20
Florida                                           21.8                75                9.1                 15
Arizona                                           20.6               129                 8.6                17
New Jersev                                        18.5               123               -9.9                 10
South Dakota                                      18.0                25                 7.1                20
Louisiana                                         17.4                30               13.6                 Ii
Alaska                                            16.6               223                 5.6                41
Minnesota                                         16.6               134                 9.2                21
Tennessee                                         16.2                30               13.4                 18
Iowa                                              16.1                44                10.8                19
lllinors                                          15.2                34                 8.9                18
Massachusetts                                     12.4               126                 8.5                21
Nebraska                                          12.0                30                11.3                19
Californra                                        11.1                57                 5.9                20
Connecticut                                        6.5                27                 7.5                16
Note: States rn bold letters are the 16 states where local fiscal disparrtres are relatively large before
receipt of grants (see table 2 3)
Source: U S Bureau of the Census. “Revenue-Shanng Allocation Frle for Entrtlement Period 17” and
“Tax and Intergovernmental Ard Frle for Frscal Year 1984/&J” (computer-based files)

In four states (West Virginia, North Carolina, Kentucky, and Montana),
general assistance programs marginally worsened disparities because
they returned revenues to the originating jurisdictions, As discussed ear-
lier, return-to-origin programs provide funding to localities in proportion
to the size of their tax bases. In effect, this targets funds to better-off
communities as opposed to disadvantaged ones. For example, in West
Virginia, the state’s primary general fiscal assistance program distrib-
uted coal severance taxes to local governments in counties where the
coal production took place. Similarly, general fiscal assistance programs


Page44                                   GAO/fIUD9O69StatesHelpCommunitiesin FiscalDistress
                                              Chapter   3
                                              FederalRevenueSharingReducedLocal
                                              F&cd Disparttks   More Than Did Most
                                              state Programs




Table 3.3: Reduction in Fiscal Disparities
in 16 States With the Widest Disparities                                                                                Percent
(pgagad by Per Capita Funding) (Fiscal Year                                                                            disparity      Per capita
                                              State                           ~~~~-..____                             reduction            grant
                                              U.S. Average                                                                    8.8             $47
                                              Alaska                                                                         16.6                 223
                                              Arizona                                                                        20.6                 129
                                              New Jersey                                                                     18.5                 123
                                              New Mexico                                                                     12.4                 120
                                              Florida                                                                        21.8                  75
                                              Louisiana                                                                      17.4                  30
                                              Tennessee                                                                      16.2                  30
                                              Mame                                                                           17.5                  27
                                              South Dakota                                                                   18.0                  25
                                              Colorado                                                                         0.9                -
                                              Oklahoma           ___~                    _____~                                3.3
                                              Texas                                                                            0.6                    3
                                              Kentucky                                                                        (0.3)                   2
                                              Vermont                                                                          2.5                    2
                                              Missouri                                                                         1.1                    1
                                              Utah                                                                             1.3                    1
                                              Source: U S. Bureau of the Census, “Revenue-Sharing Allocation File for Entitlement Penod 17” and
                                              “Tax and Intergovernmental Ard File for Fiscal Year 1964/1985” (computer-based files)

                                              All of the remaining seven states whose general assistance programs
                                              had little effect on disparities provided relatively small amounts of
                                              assistance ($6 per capita or less).


                                              Overall, federal revenue-sharing was better targeted to disadvantaged
Better-Targeted                               governments   than state assistance. Despite funding levels almost two-
Federal Aid Reduced                           and-one half times the size of federal revenue-sharing, state general
Disparities More Than                         assistance grants reduced fiscal disparities less than the federal pro-
                                              gram. Nationally, state programs reduced disparities by 8.8 percent, the
State Aid                                     federal program 11 percent.”

                                              In 31 of the 48 states, federal revenue-sharing was more effective in
                                              reducing local disparities because it was more targeted. While state gen-
                                              eral assistance programs reduced disparities more than federal revenue-

                                              “To measurethereductionin fiscaldisparitiesprovidedby stategeneralfiscalassistanceandfederal
                                              revenue-sharingprograms,wecalculatedthestandarddeviationsin localgovernments’   tax burdens
                                              perdollarof servicesbeforeandafterreceivingaid.A decrease in standarddeviationsthenwas
                                              expressedas a percentage reduction.
Chapter3
FederalRevenueSharingReducedLocal
Fiscal DisparitiesMoreThanDid Most
state FTcJgrluns




                                                                  Disparity reduction
                                                                  As a cercent of
                                                                     U.S. average     Per capita
State                                                     Percent      (U.S.=lOO) general aid
U.S. Average                                                 18.1              100            85
Wyoming                                                         16.7                   92               189
Wisconsin                                                       15.9                   68               196
Californta                                                      15.8                   87                77
Kentucky                                                        15.7                   87                22
Oreaon                                                       -i5.7                     86                45
Ohio                     -                                       15.6                  86                54
Texas                    -    .~~                                15.5                  86                18
Connecticut                                                     15.1                   83                43
North Carolma                                                    14.7                  81                49
Maryland                                                         14 6                  81                53
Utah                                                             136                   75                23
Kansas                                                          i3.2                   73                35
Oklahoma                                                         12.9                  71                20
Washington                                                       12.7                  70                32
Pennsylvania                                                     12.7                  70                22
Vtrgtnia                                                         12.2                  67                23
Missouri                                                         12.0                  66                17
Indiana                                                          11 5                  64      ~-        57
Colorado                                                         95                    52                23
North Dakota                                                     8.1                   45                65
New York                                                    -    7.0                   39                88
Montana                                                          53                    29                27
Note States tn bold letters are the 16 states where local fiscal dtsparitres are relatwely large before the
recetpt of grants (see table 2.3)
Source. U S. Bureau of the Census, “Revenue-Shanng Allocatton File for Entitlement Period 17” and
“Tax and Intergovernmental Atd File for Frscal Year 1984/85” (computer-based ftles).

The national average reduction in fiscal disparities was 18.1 percent.
Texas was slightly below the average at 15.5 percent. A few states did
much better or worse. Disparities were reduced by more than twice the
national average in three states: Nevada (54.7 percent), South Carolina
(39.7 percent), and Arkansas (36.1 percent). However, they were
reduced by less than half the national average in three others: Montana
(5.3 percent), New York (7.0 percent), and North Dakota (8.1 percent).




Page40                                  GAO/HRB9@69
                                                  StatesHelpCommunitiesin FiscalDistress
                     Chapter3
                     FederaIBevenueSharingRedwedLocal
                     FiscalDbparkIeaMoreThanMd Most
                     state Programa




                     The remaining four states were near the national average in terms of
                     funding. To offset local disparities as much as states with large pro-
                     grams, they would need to target a larger proportion of their aid to fis-
                     cally distressed governments.


                     In 1985, combined state and federal general fiscal assistance reduced
General Fiscal       local disparities among general purpose local governments by 18.1 per-
Assistance Reduced   cent (see table 3.2).3 Much of this reduction was due to targeting, not the
Disparities          amount of aid provided. The reductions varied widely across states-
                     ranging from as much as three times the national average (Nevada,
                     54.7 percent) to as low as one-third of the average (Montana,
                     5.3 percent).

                     A comparison of two counties in Texas, Starr and Wheeler, illustrates
                     how the percent reduction in disparities, shown in table 3.2, can be
                     interpreted. That state’s 15.5~percent reduction represents the average
                     reduction in tax burdens borne by the average resident in each county
                     compared with the average-income county. In Starr County, the average
                     resident’s income in 1984 was the lowest in the state at $3,704. This
                     compared with Wheeler County’s personal income per resident of
                     $9,916, which was close to the state average income of $9,913.4 Before
                     general fiscal assistance, expenditures for public services were $136 per
                     resident in Starr County compared with $353 in Wheeler County. Yet,
                     the tax burden borne by the average Starr County resident was slightly
                     more than twice that of the average Wheeler County resident, when
                     expressed on a per-dollar-of-service basis.

                     If a resident of Starr County earning the average income and bearing the
                     typical tax burden, moved to Wheeler County, he or she would pay
                     $37.21 less in taxes for every $100 worth of public services. This differ-
                     ence in tax burdens represents the fiscal disadvantage of the average-
                     income Starr County resident compared with the average-income resi-
                     dent in Wheeler County.

                     State and federal general fiscal assistance aid received by Texas local
                     governments reduced the fiscal disadvantage of low- compared with

                     “Wemeasured  disparitiesby thestandarddeviationsin localgovernmenta’
                                                                                       tax burdensperdollarof
                     services.Wecalculatedthestandarddeviationwith andwithouttotal generalfiial assistance
                                                                                                         aid.In
                     everystate,thestandarddeviationwassmallerafteraccountingfor generalfiscalassistance.
                                                                                                        The
                     decreasewasthenexpressed   asa percentage
                                                             reduction.
                     ‘In our analysis,Wheeler’s
                                              tax burdenperdollar’sworthof servicesbecomes
                                                                                         the standardwith
                     whichothercountyareatax burdensarecompared.


                     Page38                           GAO/HBDSO49
                                                                StatesHelpCommnnitiesin Eisfal Mstnarr
chapter 3
FederalRevenueSharingReducedLocal
FiscalDlspiulties MoreThanDid Most
state ~grams




                                                                     Percent of local revenues
State                                                             Combined        State       Federal
Maine                                                                  16.1          9.1          7.0
Alaska                                                                 14.9        12.6           2.3
North Carolina                                                          14.4         a.7          57
Tennessee                                                               14.2           9.0               5.2
Iowa                                                                    13.5           9.6               4.0
Nebraska                                                      -         13.3           8.1               5.1
Rhode island                                                            13.2           7.9               5.4
South Dakota            -                                               13.0           7.2               57
New Hampshire                                                           12.9           9.1               3.8
Alabama                                                                 12.7           6.2               6.5
U.S. Average                                                            12.3           a.7               3.5
Illinois                                                                12.2           8.0                4.3
Louisiana                                                               12.1           7.7                4.5
Ohto                              ~~~__-                      -         11.3           7.6                3.7
Oregon                                                                  10.7           5.9                4.9
Californta                        ~~~~-.-                                9.8           7.3                2.5
Connecticut                                                              9.0           5.7                3.3
Vermont                                                                  8.8           0.6                8.2
Kentuckv                                                                 9.3            0.9               8.4
Montana                            ~~__.                                 9.0            1.3               7.7
Marvland
A       -.______-..-              ~~~
                                                                         8.9            5.6               3.4
Kansas                                                                   8.7            4.8               3.9
Washmgton                                                                73             3.4               3.8
Utah                                                                     7.1            0.5               6.6
Oklahoma.                                                                6.6            10                5.6
New York                                                                 6.3            4.5               1.9
Georgta                                                                  5.9            0.8               5.1
Pennsvlvania                                                             5.6            0.9               4.7
Texas                                                                    5.2            0.9               44
Virginta
___-                                                                     5.1            1.2               33
Missouri                                                                 5.0            0.3               4.7
Colorado                                                                 4.0            1.0               3%
Note. States in bold letters are the 16 states rn whtch local ftscal disparities were relattvely large before
allowing for the effect of general ftscal assistance grants (see table 2.3) Also, figures do not add due to
rounding
Source. U S Bureau of the Census, “Revenue-Sharing Allocation Ftle for Entttlement Period 17” and
“Tax and Intergovernmental Atd File for Fiscal Year 19&t/&35”(computer-based files).

Nationwide, state aid was more than twice that of federal revenue-
sharing when expressed as a percentage of local revenues-g.7 com-
pared with 3.5 percent. State aid exceeded revenue sharing as a share of



Page36                                   GAO/HRD-90.69
                                                    StatesHelp Communitiesin FiscalDistress
                                             Chapter 2
                                             Fiscal Disparities:Their Nature,Sources,
                                             and Extent




Figure 2.4: Extent of Potential Fiscal Disparities Within Each State (1985)




              Relativelv tame diwarities
              Near average disparities
              Relatively small disparities


                                             Source: U.S. Bureau of the Census, “Revenue-Sharing Allocation File for Entitlement Perlod 17” and
                                             “Tax and Intergovernmental Aid File for Fiscal Year 1084/85” (computer-based files).




                                             Page34                                GAO/HRD.9O-69
                                                                                              State Help Communitiesin PiscalDistress
                                        Chapter2
                                        PiscalDisparities:Their Nature,Sources,
                                        and Extent




Table 2.3: States Ranked by Extent of
Local Fiscal Disparities, Assuming No   State                                                                        Index no.
State and Federal General Fiscal        States with relatively large disparities:
Assistance (Fiscal Year 1985)                                                                                              159
                                        Kentuckv
                                        New Mexico                                                                         156
                                        Maine                                                                              153
                                        South Dakota                                                                       148
                                        Flonda                                                                             146
                                        Vermont                                                                            134
                                        Alaska                                                                             133
                                        Loursrana                                                                          132
                                        Texas                                                                              128
                                        Tennessee                                                                          127
                                        Oklahoma                                                                           124
                                        New Jersey                                                                         123
                                        Mrssourr                                                                           120
                                        Arrzona                                                                            116
                                        Colorado                                                                           113
                                        Utah                                                                               113
                                        States with near average disparities
                                        Virginia                                                                           111
                                        West Vrrarnra                                                                      107
                                        South Carolina                                                                     106
                                        New Hampshire                                                                      106
                                        Mississippr                                                                        105
                                        Massachusetts         -                           -                                102
                                        Georgia                                                                            102
                                        Arkansas                                                                           101
                                        U.S. Averaae                                                                       100
                                        Idaho                                                                               96
                                        Illinois                                                                            96
                                        North Carolrna                                                                      96
                                        Michigan                                                                 -          95
                                        Alabama                                                                             94
                                        Maryland                                                                            93
                                        Wisconsin                                                                          88
                                        New York                                                                           87
                                                                                                                 (continued)




                                        Page32                             GAO/HRD-99.69
                                                                                      StatesHelpCkmmunitiesin F’imalDistress
                                                                                      chapter 2
                                                                                      Fiscal Dlspmlties:                          Their Nature,                Sonrces,
                                                                                      and Extent




Figure 2.2: Dispersion of County Tax Burdens Per $100 Dollars of Public Services in 67 Florida Counties (Fiscal Year 198!3)

2.0     Tax Burden               Per $100 Dollars          of Services
                                                                                                                                                                                          Union Co
1.9                                                              n                                                                                                                        d

1.6

1.7                                            n           I                      n

1.6             n           n                                                                                         m                                                                               n

1.5                                                                                           q                   n                       n                                                               n

1.4     n                                                            n                    n                               n                                                          mm           n

1.3                              n       mm                    n n n                              n                                                              n                    n

1.2 l

1.1         n                                          n                 mm                                   n                       I           n       n n            I
1.0                             mm                                            n                       n                           n                                  n                        n

0.9                 n                     n        n                                                      n                   n               n                                  n

0.9                                  n                                                n                                           m                        n
                                                                                                                                                      Palm Beach Co.
0.7                     n                                                                                                                             d                      n

0.6


         Counties
                                Averagestate       tax burden

                                                                                      Note. The 67 counties are arrayed alphabetically on the horizontal axis.
                                                                                      Source U.S. Bureau of the Census. “Revenue-Sharing Allocation File for Entitlement Period 17” and
                                                                                      “Tax and Intergovernmental Ald File for Fiscal Year 1994/W (computer-based files)

                                                                                      In contrast, the dispersion in tax burdens among Iowa counties is rela-
                                                                                      tively small, with county tax burdens bunched more closely around the
                                                                                      state average, as shown in figure 2.3. The tax burden per $100 of ser-
                                                                                      vices was 0.7 percent in Polk County compared with 1.34 percent in
                                                                                      Decatur County. Without outside assistance, the dispersion in local tax
                                                                                      burdens in Florida would be about two and one-half times greater than
                                                                                      among Iowa’s counties.




                                                                                      Page 30                                                                        GAO/HlD9989                      States Help Communltles   in FIscal Mstresa
                          chapter 2
                          FiscalDisparities:Their Nature,Sources,
                          and Extent




                          have not been annexed by adjacent cities. There is no economic incentive
                          for municipalities to annex communities with weak tax bases, especially
                          when more resources would have to be spent on services in these areas
                          than would be gained in additional tax revenues.

                          Unilateral or even negotiated annexation is not legal or feasible in all
                          states. In New Jersey, for example, there are no unincorporated areas.
                          For a local government to expand, it would have to be through consoli-
                          dation with another local government.


Revenue Restriction May   Restricting local revenue-raising authority may increase the level of fis-
Increase Disparities      cal disparities, especially if local governments with low incomes and
                          high public service costs are prevented from exporting taxes.g For exam-
                          ple, New York City imposes a tax on all income earned within the city.
                          This allows the city to pass some of its tax burden to nonresidents.

                          Yet, most major cities lack the authority to levy an earnings tax on non-
                          residents who work within their jurisdictions and presumably use many
                          of the city’s public services. For example, in 18 of the 20 largest metro-
                          politan areas, the central city had less tax-raising ability than the sur-
                          rounding suburban communities in 1986.“’ As of 1988, slightly over half
                          of these 18 cities were unable to compensate for this disadvantage by
                          shifting some of their tax burden to nonresidents by means of a local
                          income or payroll tax.


                          If localities had to finance all services without outside aid, sizable fiscal
Extent of Local Fiscal    disparities would result and differ substantially among states. For
Disparities               example, in Iowa tax burdens per dollar of services received in the most
                          distressed counties were about 70 percent greater than in the “best-off”
                          counties. In Florida, tax burdens in Union County were nearly three
                          times greater than in Palm Beach County.

                          To estimate the potential extent of local fiscal disparities within each
                          state, we initially assumed that local governments delivered and
                          financed all of the public services now being provided exclusively from
                          own-source revenues. Using this assumption, we calculated a county’s

                          “Tax limitationinitiativessuchasProposition13in CaliforniaandPropositionZ-1/2in Massachusetts
                          donot widenfiscaldisparities,becauseall localgovemments areaffectedequally.
                          “‘SeeLocalGovernments:
                                              Tar etin GeneralFiscalAssistance
                                                                             Reduecs
                                                                                   FiscalDisparities
                          (GAOmD-86-113,July 19&p. !I).


                          Page28                           GAO/HRINO89StateaHelp Communitiesin PiscalDistress
Chapter2
FiscalDisparities:Their Nature,Sources,
andExtent




State general fiscal assistance programs use various methods for target-
ing aid,” e.g.:

1. Return to origin, which does little to reduce local disparities. Essen-
tially, the state collects revenues from a specific tax base and returns all
or a portion of those taxes to local governments according to the share
of the tax base lying within its borders7 Tennessee, for example, taxes
individuals’ dividend and interest income. Of the total amount collected,
the state keeps five-eighths and returns three-eighths to the municipal-
ity or county in which the individual resides. The grant component of
this tax does not reduce disparities because more funding is provided to
localities whose tax bases generate the most revenues.

2. Needs only, in which the state distributes funds on the basis of popu-
lation or other indicators of social needs, such as poverty or unemploy-
ment. By reducing the local burden of financing these needs, programs
contribute to reduced local fiscal disparities. For example, in fiscal year
1986, New Jersey’s state revenue-sharing program distributed this aid
to municipalities according to each jurisdiction’s share of state popula-
tion (see app. VI).

3. Tax base targeting, in which fund distribution is baaed on the level of
the local tax burden. It is more efficient in reducing disparities than
either of the other two approaches because it can reduce the gap
between better- and worse-off communities with less funding. In 1987,
Massachusetts’ Additional Assistance Program used local governments’
fiscal capacities and data reflecting their differing levels of social needs
to allocate funds. After setting a level of expenditures subject to aid,
based on indicators of each local government’s social needs, the state
estimates the amount of revenues that the local government should be
able to raise locally. Then t,he state’s Additional Assistance Program
partially fills the gap between the estimated levels of expenditures and
revenues.

Several states have created general fiscal assistance programs that use a
combination of these three allocation methods to distribute funds. For
example, Kansas’s County-City Revenue Sharing Program used needs
and return-to-origin factors to allocate its aid. The program formula
allocated 65 percent of the money among county areas according to their

“Seeapp II-XII for descriptions
                              of specificstateprogramandformulasin the 11stateswevisited
7Thisincludesonly thereturnof state-unposed taxes,not thereturnof taxeslocallyimposedbut
collectedby the state An rmmpleof thelatter wouldbea localoptionsalestax.


Page26                            GAO/HRD9689StatesHelpCommunitiesin FiscalDistress
                      chapter 2
                      Fiscal Disparities:   Their Nature, Sources,
                      and Extent




                      pregnant mothers, to more broadly defined activities, such as commu-
                      nity services. The $38 billion in such aid comprised 71 percent of state
                      and federal grant funding in 1985.

                      2. General purpose fiscal assistance is unrestricted aid that may be used
                      to fund whatever public services local governments deem necessary.
                      Therefore, it is most easily designed to offset fiscal disparities. Nearly
                      all states provided general fiscal assistance, which totaled $10.9 billion
                      in 1985. The major federal program providing general fiscal assistance
                      was the general revenue-sharing program, which allocated $4.6 billion
                      among 39,000 local governments in 1985, the year before it was
                      terminated.

                      Combined, state and federal grants form a significant revenue source for
                      financing locally provided services. Nationwide, they exceeded $53 bil-
                      lion in 19854 and represented 34.8 percent of local revenues (see table
                      2.2).

                      Grant financing of locally delivered services tended to be only slightly
                      greater in decentralized states than in centralized states.” However,
                      there were exceptions among decentralized states. In California, Ari-
                      zona, and Nevada, the proportion of grants substantially exceeded the
                      national average, but in most other large decentralized states, such as
                      New York and Texas, the proportion was well below the national
                      average.


                       In addition to the level of grant funding, how such funding is targeted
Grant Targeting Can    also affects the extent of local fiscal disparities. Even when grants
ReduceLocal            finance a relatively small share of local services, disparities can be sub-
Disparities            stantially reduced if the funds are targeted to fiscally disadvantaged
                       communities.

                       In practice, categorical grants tend to be distributed according to pro-
                       gram needs, not the ability of local taxpayers to finance services from
                       local resources. Tennessee’s local highway aid program typifies this. It
                       uses highway funds to repair and maintain about 12,000 miles of high-
                       ways. The state finances about 75 percent of total costs, county govern-
                       ments 25 percent.

                       “Seeapp.XIII for a state-by-state
                                                      breakdownof this figure.
                       “A weaknegativestatisticalrelationshipexistsbetweenthedegreeof servicecentralization(table
                       2.1)andthedegreeof financecentralization(table2.2).Thecorrelationcwfficientis -0.20.


                       Page24                                 GAO/HRLS9049   States Help Communities   in Fiscal Distress
                    chapter 2
                    Piseal Dlsparlties:   Their Nature,   Sources,
                    and Extent




                    Centralizing the delivery of public services at the state level has advan-
                    tages and disadvantages. It can reduce the size of local fiscal disparities
                    by reducing the reliance on unevenly distributed local tax bases to
                    finance services.2 The major disadvantage is that state-provided services
                    are likely to reflect the average preferences of all state residents. Conse-
                    quently, the level of services provided in each community is less likely
                    to be responsive to local preferences. Decentralized service delivery, on
                    the other hand, allows local governments to respond to such differences.

                    Nationwide, we estimate state governments deliver over half of all
                    noneducation public services provided to state residents (see table 2.1).
                    For Vermont, the most centralized state, the state government provided
                    79 percent of all noneducation public services in 1985. The most decen-
                    tralized state is Nevada, in which the state government directly pro-
                    vided 38 percent of all such public services.

                    The range of service centralization shown in table 2.1 reveals a pattern
                    among small and large states. States with small populations and land
                    area tend to be centralized and provide services at the state level. This
                    includes all six New England states which, except for Massachusetts and
                    Connecticut, have relatively small populations. Decentralized states tend
                    to be geographically large (Nevada and Arizona), more populous (New
                    York and Florida), or both (California and Texas). About 11 percent of
                    the U.S. population lives in the 12 most centralized states and about
                    44 percent in the 12 most decentralized states.


                     Another means of reducing local fiscal disparities is through the provi-
Level of Grant       sion of grants used to finance local services. Decentralized states, where
Financing Another    local governments deliver a larger proportion of services, provided
Factor               grants that were only slightly larger than those provided in centralized
                     states. Consequently, decentralized states are unlikely to offset local dis-
                     parities to the same extent as more centralized states.




                     2Fiscaldisparitiescanbenarrowedby servicecentralizationif statesdeliverservicesonthebasisof
                     relativecommunityneedsandtheincidenceof statetaxeswith respectto personalincomeis more
                     progressivethanthe incidenceof localgovernment
                                                                  taxes.


                     Page 22                                  GAO/HEN089   States Help Commnnitiea   in Fiscal Dhtrecrs
                                                                                                                                  Chapter2
                                                                                                                                  PiecalDlsparlties:Their Nature,So-,
                                                                                                                                  and Extent




VMP 3 I. llhmtratinn
,   -.       -   -.   .   .   .   .   .   -   -   .   .   -   .   . -.    .
                                                                              nt Fiacnl Disaaritv
                                                                              -.         .___.     ___r   ____,    Between
                                                                                                                   -       __..     --   Alaine and Woodbine
                                                                                                                                         .   .   r   ..-   -..-   ..~   ~~~   Eorouahe.
                                                                                                                                                                              ~.    ”     ,
                                                                                                                                                                                              New Jersev (1983)
                                                                                                                                                                                                        .I    I




         $0                                                              $25,000                                  $50,000
         Income per capita




         0%     .5                                        1 .o                     1.5           2.0      2.5      3.0%
         Tax burden




         $0                               $75                                 $150                 $225                $300
         Revenue per capita

         m                    Alpine

                              Woodbine




                                                                                                                                   Fiscal disparities arise in part from communities’ differing socioeco-
SocioeconomicSources                                                                                                               nomic characteristics, such as:
of Fiscal Disparities
                                                                                                                       l           The ability of communities to bear local tax burdens. As the Woodbine/
                                                                                                                                   Alpine example shows, communities with per capita incomes above the




                                                                                                                                   Page20                                          GAO/Hl-#w)BSStatesHelpCamunities in Pisd Dishess
F’iscalDisparities: Their Nature, Sources,
and Extent

                Fiscal disparities are differences in communities’ abilities to provide
                comparable levels of public services with comparable tax burdens on
                local residents. They arise from differing socio-economic factors, such as
                (1) the financial ability of local residents to bear tax burdens, (2) the
                unit cost of providing services, and (3) social conditions that affect pub-
                lic service needs, including high crime rates or poverty concentrations.

                To a large extent, the fiscal disparities arising from such socioeconomic
                differences are beyond the ability of local governments to control. As a
                consequence, these governments seek state and federal assistance so
                they can provide basic public services while keeping local tax rates com-
                parable to those of neighboring communities. Such aid can ameliorate
                the fiscal disparities among localities, depending on the degree to which
                it is targeted to those with relatively high tax burdens per dollar of ser-
                vices received.

                How the responsibility for delivering public services is divided between
                the state and its local governments is another factor affecting the degree
                of fiscal disparity. States differ significantly in the extent to which they
                centralize service delivery. Nationwide, we estimate, state governments
                delivered over half of all noneducation public services provided to state
                residents in 1985. Significant variation existed among states. In some,
                such as Vermont and Alaska, the state provided over three-quarters of
                such services to its residents, while in others, such as Florida and
                Nevada, the state provided less than 40 percent.

                If localities had to finance all the services they provide locally without
                state or federal grants, sizable fiscal disparities would result and their
                degree would differ substantially among states. For example, local fiscal
                disparities would be relatively small in Iowa, where they would be about
                half the national average. The tax burden per dollar of public services in
                Iowa’s most distressed county would be about 70 percent greater than in
                the “best-off” county. In contrast, fiscal disparities would be relatively
                large in Kentucky, New Mexico, and Florida. In Florida, for example, the
                tax burden per dollar of services would be nearly three times greater in
                the most fiscally distressed counties than in the “best-off.”

                Other factors that influence the magnitude of local fiscal disparities, dis-
                cussed but not analyzed in this report, are the setting of local govern-
                ment boundaries and state restrictions on the ability of local
                governments to shift taxes to nonresidents.




                Page 16                     GA0/HRD9069   States Help Communities   in F-is&   Distress
                           chapter 1
                           Introduction




Assessing How Much State   To measure the effects of state and federal general fiscal assistance aid
                           in reducing local fiscal disparities, we calculated per capita spending on
and Federal General        local public services first without and then with the receipt of general
Assistance Reduces         fiscal assistance aid. We then compared the standard deviation in local
Disparities                tax burdens per dollar of public service benefits before and after the
                           receipt of aid. The percent decrease in the standard deviation measured
                           the disparity reduction attributable to general fiscal assistance aid.R It
                           represents the average reduction in tax burden differences between fis-
                           cally distressed and “better-off” communities. We then applied this
                           method to state and federal aid separately in order to compare how
                           much each reduced disparities.

                           In performing our analysis, we analyzed only the distribution of state
                           and federal general fiscal assistance grants. We did not consider other
                           factors that could reduce disparities among local governments. Among
                           these are special purpose state and federal aid programs and services
                           provided directly by state governments to local communities. A more
                           comprehensive analysis also would take into account who pays the state
                           and federal taxes used to finance the grant programs. For a more com-
                           plete discussion of this issue, see p. 53.




                            *.!keapp.I for a morecompletediscussion
                                                                  of issuesrelatedto thedefiition of fiscaldisparitiesand
                            measurement   methodology.


                            Page 16                            GAO/HFtBSM9     States Help C!~mmunities   in Pimd   Distress
                                                                                                                           -
                                     Chapter1
                                     Introduction




Assessing the Relative               As an indicator of a local government’s fiscal condition, we used the
                                     ratio of its average effective tax rate to its per capita expenditures4
Extent of Fiscal                     Local effective tax rates serve as an indicator of the tax burden borne
Disparities Within a State           by local residents, and per capita expenditures indicate the public ser-
                                     vice benefits they receive.

                                     Next, we defined local fiscal disparities as differences in the fiscal con-
                                     ditions of local governments. We chose the standard deviation in local
                                     fiscal conditions as a summary measure of fiscal disparities in each
                                     state.5 To identify the states with the largest disparities, we ranked the
                                     48 states6 in our analysis by the degree to which fiscal disparities were
                                     larger or smaller than the national average of all states.

                                     To overcome the unavailability          of some data as well as certain other
                                     analytical problems, we

                             l limited our review to general purpose governments. Only they were eli-
                               gible to receive federal revenue-sharing, and this study was intended to
                               help the Congress assess the possible need for a replacement program.
                               Consequently, school and special districts (which provide a single ser-
                               vice) were excluded.
                             . totaled all economic, fiscal, and demographic data to the county area
                               level within each state. This simplified the analysis, gave us comparable
                               units of analysis,? and eliminated the need to account for the varying
                               structure of local government service responsibilities in each state. By
                               averaging out differences among individual governmental units within
                               each county, this approach tends to understate disparities and yield con-
                               servative estimates of the extent of fiscal disparities in a state.
                               used fiscal year 1985 state and local government tax and grant data. We
                                 l


                               did so because we wanted to compare the targeting of state and federal
                               general fiscal assistance aid and 1985 was the last year the federal pro-
                                gram provided aid to local governments. Analysis of more current data

                                     4Effectivetax rates,whichdiffer fromstatutorytax rates,aremeasuredasthepercentage
                                                                                                                     of the
                                     averageresidentpersonalincomein a countyareathat all localtaxesrepresent.
                                     %eeapp.I for a morecompletediscussion
                                                                         of issuesrelatedto thedefinitionof fiscaldisparitiesand
                                     our measurement methodology
                                     “WeexcludedDelawareandHawaiibecause
                                                                       theyhavetoofewlocalunitsof government
                                                                                                          to obtain
                                     statisticallymeaningfulresults
                                     7Forselectedstates,however,weusedmunicipalitiesasourunit of analysisbecause
                                                                                                               eitherthere
                                     weretoofewcountiesto eerveasunitsof observationsor thecountygovernments hadlimitedgov-
                                     ernmentalresponsibilities.
                                                             ThesestateswereConnecticut, Maine,Massachusetts,
                                                                                                            NewHampshire,
                                     NewJersey,RhodeIsland.andVermont.


                                     Page14                            GAO/HRD99-69    StatesHelpC~mmnnitieain FiscalDistress
Figure 1.2: Share of U.S. Population
Living in Low-, Mlddle-, and High-Income
Counties (1977-87)                         Pmcml of U.S. PapUlatkxl




                                                  El      High ~r-vxme (greater than 120% of U.S. average)
                                                          Middle income (between 80% and 120% of U.S. average)
                                                          Low income (less than 80% of U.S. average)

                                           Source: GAO calculations,   based on U.S. Department of Commerce, Bureau of Economic Analysis Data.


                                           1. Should taxpayers in poor communities bear higher tax burdens than
                                           rich communities to finance their basic public service needs?

                                           2. Should disparities serve as an incentive for residents and businesses
                                           to move to communities with plentiful public services and low taxes?

                                           State officials assign differing degrees of significance to these equity
                                           concerns. Our survey of state officials and state aid programs shows
                                           that state perceptions of local fiscal disparities cover a wide range. Some
                                           states regard them as an important public concern that merits remedial
                                           action, while others see them as outside their scope of responsibility.

                                           In part, federal concern about local fiscal disparities prompted the crea-
                                           tion of the federal general revenue-sharing program in 1972. Some mem-
                                           bers of the Congress have expressed concern that the 1986 expiration of




                                           Page12                                  GAO/HlHMO89StatesHelp C~mmunibles
                                                                                                                   in FiscalDistress
Chapter 1

Introduction


               A major benefit of our federal system of government is its ability to pro-
               vide for a wide range of public services desired by its citizens. The fed-
               eral government provides services that address national needs, such as
               defense and regulation of interstate commerce. Typically, services from
               state governments benefit citizens across the entire state, such as the
               construction and maintenance of highways. At the local level, services
               are tailored to reflect the needs and preferences of local residents.

               The nearly 39,000 general purpose local governments’ in the United
               States include 3,042 county, 19,200 municipal, and 16,691 township
               governments.” The fact that they delivered 46 percent of all public ser-
               vices offered to state residents in 1985 underscores the important role
               of these governments.

               Local governments have shouldered an increasing share of the cost of
               public services provided at the local level. In the decade since 1977, the
               local share of general revenues raised at the local level increased 16 per-
               cent, from 60 to 69 percent, as shown in figure 1 .l Federal aid as a
               percentage of total local revenues fell almost three-fifths, from 12 to 5
               percent. The expiration of federal revenue-sharing in 1986 accounts for
               about 44 percent of this decrease. Over this same time period, the state
               share of local revenues fell slightly, from 28 to 26 percent.

               The ability of local taxpayers in low-income counties to shoulder a
               larger share of service costs has deteriorated compared with more afflu-
               ent areas. Since 1977, the income gap between poorer and more affluent
               communities has widened. The number of residents living in counties
               with incomes more than 20 percent below the national average has risen
               from 16 to 19 percent of the U.S. population (see fig. 1.2). This
                19-percent increase implies that income growth for most low-income
               counties lagged behind the national average. In contrast, incomes in the
               most affluent counties have increased faster than the national average.
               Their share of the 1T.S.population has risen from 11 to 16 percent, a
               45 percent increase,

               As the ability to bear tax burdens is directly related to income, this sug-
               gests that fiscal disparities between poorer and more affluent areas
               have increased. At the same time, local financing responsibilities have

               ‘Generalpurposelocalgovernmentsincludecounties,municipalities,
                                                                            andtowns.Thisexcludesboth
               schooldistrictsandspecialpwpasedistrictsfor reasonsdiscussed
                                                                          onpg. 14.
               %urce:   U.S. Bureau   of theCrnsus,1987Censusof Governments,
                                                                          Vol.1,Governmental
                                                                                          Organization,
               table3, p, 3


               Page10                             GAO/HRD-90.69
                                                             StatesHelpCommunitiesin FiscalDisti-ess
                                                                                  -
Figures   Figure 1.1: Distribution of Local Government Revenue                        11
               Sources (197787)
          Figure 1.2: Share of U.S. Population Living in Low-,                        12
               Middle-, and High-Income Counties (1977-87)
          Figure 1.3: States Selected by GAO for Fieldwork                            17
          Figure 2.1: Illustration of Fiscal Disparity Between Alpine                 20
               and Woodbine Boroughs, New Jersey (1983)
          Figure 2.2: Dispersion of County Tax Burdens Per $100                   30
               Dollars of Public Services in 67 Florida Counties
               (Fiscal Year 1985)
          Figure 2.3: Dispersion of County Tax Burden Per $100                    31
               Dollars of Public Services in 99 Iowa Counties (Fiscal
               Year 1985)
          Figure 2.4: Extent of Potential Fiscal Disparities Within               34
               Each State (1985)




          Abbreviations

          AFDC       Aid to Families with Dependent Children
          8-f        fiscal year
          GAO        General Accounting Office
          TVA        Tennessee Valley Authority


          Page8                      GAO/HRD90~9StatesHelpCommunitiesin FiscalDistress
Contents


Executive Summary                                                                                 2

Chapter 1                                                                                        10
Introduction              Local Fiscal Disparities: A Matter of Public Concern
                          Objectives, Scope, and Methodology
                                                                                                 11
                                                                                                 13

Chapter 2                                                                                        18
Fiscal Disparities:       The Nature of Fiscal Disparities
                          Socioeconomic Sources of Fiscal Disparities
                                                                                                 19
                                                                                                 20
Their Nature, Sources,    Centralizing Service Delivery Affects Local Disparities                21
and Extent                Level of Grant Financing Another Factor                                22
                          Grant Targeting Can Reduce Local Disparities                           24
                          Other State Policies Affecting the Extent of Local                     27
                               Disparities
                          Extent of Local Fiscal Disparities                                     28

Chapter 3                                                                                        35
Federal Revenue-          General Fiscal Assistance: An Important Local Revenue
                               Source
                                                                                                 35
Sharing Reduced Local     Larger or Better-Targeted Aid Programs Would Reduce                    37
Fiscal Disparities More        Fiscal Disparities
Than Did Most State       General Fiscal Assistance Reduced Disparities                          38
                          Targeting More Important Than Funding in Reducing                      41
Programs                       Fiscal Disparities
                          Disparity Reduction Mixed in States With Widest                        41
                               Disparities
                          Better-Targeted Federal Aid Reduced Disparities More                   42
                               Than State Aid
                          State Reaction to Loss of Federal Revenue-Sharing                      45
                               Minimal
                          Conclusion                                                             46

Appendixes                Appendix I: Definition and Measurement of Local Fiscal                 48
                              Disparities
                          Appendix II: General Fiscal Assistance Programs in                     54
                              California
                          Appendix III: General Fiscal Assistance Programs in                    60
                              Kansas
                          Appendix IV: General Fiscal Assistance Programs in                     63
                              Massachusetts



                          Page6                       GAO/HUD.9989
                                                                 StatesHelpCommuniUea
                                                                                    in FiscalDistress
                         Executivesumm&uy




                         billion. Combined, this aid reduced disparities by approximately 18 per-
                         cent. But when separately analyzed, federal revenue-sharing was
                         targeted more to distressed communities than was state aid. As a conse-
                         quence, although the federal program had less than half the funding of
                         state general fiscal assistance, it reduced disparities more than did most
                         state programs.

                         Using existing levels and sources of funding, local fiscal disparities
                         could be reduced further if states targeted more of their aid to fiscally
                         distressed communities.



GAO’s Analysis

Extent of Disparities    Absent state and federal grants, fiscal disparities would be large in most
                         states. For example, there would have been a 3-to-1 disparity in tax bur-
                         dens between Florida’s best-off and worst-off counties. In Union County,
                         residents would have had to pay taxes equal to 1.9 percent of their
                         income for each $100 of public services they received, while in Palm
                         Beach County residents would have had to pay taxes equal to just 0.7
                         percent of their income for each $100 of services (see pp. 28-29).

                         In contrast, fiscal disparities would be smallest among Iowa counties.
                         The tax burden per $100 of expenditures for services would be 70 per-
                         cent higher in the most disadvantaged county compared with the best-
                         off county. This 1.7~to-1 tax burden disparity was half the national
                         average (see p. 29).


General Fiscal Aid Has   Nationally in 1985, state general purpose fiscal assistance and federal
Little Effect            revenue-sharing reduced tax burden disparities between fiscally dis-
                         tressed and better-off counties by 18 percent. Results varied widely by
                         state, ranging from a 55-percent reduction in Nevada to 5.3 percent in
                         Montana.3 When analyzed separately, the federal program reduced dis-
                         parities on average by 11 percent and state programs by almost 9 per-
                         cent (see p. 33)”

                         “GAOexcludedDelawareandHawaiibecause
                                                            theycontainedtoofewlocalitiesfor statistical
                         analysis.
                         ‘The overalldisparityreductionfor generalfiscalassistance
                                                                                 programsis lessthanthedisparity
                         reductionachievedseparately by thestateandfederalprogramsbecause    stateandfederalaidoffset
                         eachotherin somestates.


                         Page4                             GAO/‘HRD9649    States Help Chnmtmiti~   in F-iscal Diswess
Executive Summary


                 Between 1977 and 1987, direct federal aid to counties, cities, and town-
Purpose          ships declined by about three-fifths, to 5.2 percent of local revenues.
                 Although the cuts occurred in a number of programs, the 1986 expira-
                 tion of the $4.6 billion general revenue-sharing program accounted for
                 40 percent of the reductions and affected nearly 39,000 local
                 governments.

                 Concerned that the funding cuts may have had a serious effect on fis-
                 cally distressed communities, the Chairman of the Senate Finance Com-
                 mittee asked GAO to examine (1) how well state governments were
                 meeting these communities’ fiscal needs and (2) how the loss of revenue
                 sharing affected such communities.l

                 GAO'S primary objectives were to

             . identify states with wide differences in local tax burdens (fiscal dispari-
               ties) and
             l discuss the extent to which state general purpose fiscal assistance pro-
               grams reduce disparities between the fiscally distressed and better-off
               communities.


                 Fiscally distressed communities are those in which residents bear sub-
Background       stantially higher tax burdens in order to obtain levels of public services
                 comparable to better-off communities. Such tax burden differences are
                 referred to as “fiscal disparities.” They arise from differing socio-
                 economic factors, such as (1) the financial ability of local residents to
                 bear tax burdens; (2) the unit cost of providing services; and (3) social
                 conditions, including high crime rates or poverty concentrations, that
                 affect public service needs.

                 Some policymakers are concerned about fiscal disparities, seeing large
                 differences in tax burdens as inequitable. The difference between Starr
                 and Wheeler counties in Texas provides an example of the inequity. In
                 1984, the average personal income of Starr County was the lowest in the
                 state while that of Wheeler County residents was equal to the state
                 average. If a Starr County resident earning the county’s average income
                 and bearing the typical tax burden were to have moved to Wheeler
                 County, he would pay $37.21 less in taxes for each $100 of public
                 services.

                                                       to localfmcalneeds;in a separate
                 ‘This reportfocusesonstateresponsiveness                             study, GAO is examin-
                 ingtheeffectsof thelossof federalaid.