oversight

Distressed Communities: Public Services Declined in California as Budget Pressures Mounted

Published by the Government Accountability Office on 1990-08-16.

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

                United   States   General   Accounting   Office   \‘
%

GAO               Report to the Chairman, Committee on
                . Finance, U.S. Senate



August   1990
                 DISTRESSED
                 COMMUNITIES
                 Public Services
                 Declined in California
                 as Budget Pressures
                 Mounted
                      9




GAO/HRD-90-95
Human Resources Division

B-236433

August   16,199O

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

Dear Mr. Chairman:

This report provides information you requested about the condition of basic public services
in poorer California communities. It examines these conditions in the context of changing
federal-local fiscal relations due to declining federal aid and the loss of general revenue
sharing. This report examines local efforts to cope with existing fiscal problems and the loss
of federal funds and assesses whether state policies helped to offset these circumstances.
This is the second of three case studies on this subject.

Copies of this report are being sent to other congressional committees and subcommittees
and other interested parties.

Please contact me if you or your staff have any questions. I may be reached on (202) 275-
1655. Other major contributors to this report are listed in appendix I.

Sincerely yours,




Linda G. Morra
Director, Intergovernmental   and
   Management Issues
Executive Summq


                   At the request of the Chairman of the Senate Committee on Finance, GAO
Purpose            examined the condition of local public services in poorer communities in
                   light of recent declines in federal-local aid and the termination of gen-
                   eral revenue sharing (GRS).GAOvisited communities in three states to:
                   examine these conditions, identify local responses to cope with them,
                   and determine whether state policies and actions have helped to offset
                   the negative impacts of losses in federal aid. This report is a case study
                   of Yolo and Tehama, two of California’s poorer counties.


                   Local governments are the workhorses of domestic policy implementa-
Background         tion. In our intergovernmental system, the federal government looks to
                   county and municipal governments to provide basic public services,
                   such as police, fire, and public works. Local governments also help to
                   fulfill national domestic objectives, such as combatting drug abuse and
                   protecting the environment. After increasing for nearly two decades,
                   federal aid that supported these efforts declined in the 1980s. And the
                   Congress repealed the $4.6 billion GRSprogram in 1986.

                   While GRSwas a relatively small part of most local government budgets,
                   these funds were important because-unlike most federal aid-they
                   funded basic public services, such as police and fire protection, and sup-
                   ported local public infrastructure, such as schools and roads. Poorer
                   communities received more GRSfunds per capita than their wealthier
                   neighbors.


                   In California, poorer counties have been more adversely affected by
Results in Brief   state- and voter-imposed revenue limitations and the increased costs of
                   state-mandated programs than other local governments. Poorer counties
                   have a greater need for public services. At the same time, weaker local
                   economies limited the resources that these counties had to finance
                   public services.

                   In these circumstances, GRSwas important to poorer counties. Cnlike
                   most intergovernmental aid, it could be used to finance a wide variety of
                   local public services. The GRSprogram distributed more aid per capita to
                   poorer California counties than to wealthier ones. As fiscal pressures
                   mounted in the 198Os, Yolo and Tehama counties-two       counties GAOvis-
                   ited-used their revenue sharing funds to finance basic public services,
                   such as fire and police protection. When GRSterminated in 19S6. Cali-
                   fornia did not replace federal funds or take other measures to offset



                   Page 2                          GAO/HRD-90-96   Distressed   Communities   in California
                              Executive   Summary




                              these losses. Thus, although the program’s expiration did not cause k-010
                              and Tehama’s current fiscal problems, it contributed to them.

                              Before and after the expiration of GRS,Yolo and Tehama counties used
                              some strategies to cope with their worsening fiscal conditions and the
                              loss of federal aid that helped to maintain local public services. How-
                              ever, these efforts were insufficient. Thus, Yolo and Tehama were
                              forced to cut programs and postpone capital investments.



Findings

Federal Aid for Local         When domestic problems are unresolved at lower levels of government,
Public Services Fell          the federal government often intervenes through financial aid and regu-
                              lation. Grants-in-aid spending in the 1960s and 1970s reflected increased
in the 1980s                  federal involvement in local public affairs. However, in the 1980s feder-
                              alism policies changed and budget priorities shifted, causing federal aid
                              to municipalities and counties to decline substantially. These factors
                              also led the Congress to end the GRSprogram in 1986.


Voter Initiatives and State   Two voter initiatives passed in the late 1970s-Propositions    13 and 4-
Policies Adversely            work together as a comprehensive strategy for limiting government
                              growth in California. Proposition 13 reduced property tax revenues
Affected California           statewide by capping the nominal property tax rate at 1 percent of
Counties                      assessed valuation, by rolling back assessed values to their 197.576
                              levels, and by limiting annual increases in assessed valuations to no
                              more than 2 percent except when property is exchanged or transferred.
                              Proposition 4 conditions increases in government spending on increases
                              in population growth and cost of living via a statutory formula.

                              All local governments in California are subject to these revenue and
                              expenditure limitations. However, counties face greater constraints than
                              municipalities and other local governments because they rely more
                              heavily on property taxes. State policies that work to limit sales taxes
                              and user fees, as well as those designed to safeguard California farm-
                              lands, also constrained county revenues.

                              Greater relative fiscal pressures notwithstanding, counties have wider
                              service responsibilities than other local governments. They administer
                              state-mandated programs in welfare and criminal justice, and the local


                              Page 3                         GAO/HRIMJW95   Distressed   Communities   in (‘alifomia
                            Executive   Summary




                            share of these costs is growing. They also must provide such local public
                            services as police and fire protection to unincorporated areas within
                            their boundaries.


Poorer Counties Are at      All California counties have had to adjust to shrinking federal support,
Greater Risk                revenue limitations, and the rising cost of state-mandated programs.
                            However, poorer counties have been more adversely affected. Socioeco-
                            nomic indicators and other statistical evidence suggest that Yolo and
                            Tehama have greater service needs than other counties, but fewer
                            resources of their own. Also, voter initiatives and opposition to
                            increased taxes, as well as state policies, limited Yolo and Tehama coun-
                            ties’ access to local revenue sources (for example, sales and income
                            taxes) other than property taxes. At the same time, weaker local econo-
                            mies depressed real property values, which, in turn, substantially
                            reduced the rate of growth in these tax revenues in Yolo and Tehama.


Reduction and               Poorer governments, including Yolo and Tehama counties, have a
Postponement of Public      number of coping strategies to choose from when service needs exceed
                            revenues. These include management improvements and tax and user-
Services Was the Strategy   fee increases. They also include cutting services and postponing capital
Relied on Most              investments. While the first two strategies help to maintain local public
                            services, the latter two approaches reduce them. Existing fiscal
                            problems caused both counties to implement all four strategies before
                            1986, and they continued to use them after GRS ended.

                            Yolo and Tehama improved administration and program operations to
                            stave off cuts in public services. They also increased user fees, but gains
                            were modest because state law limits access to these fees. Neither
                            county raised sales taxes. Because these strategies did not overcome
                            budget shortfalls, Yolo and Tehama were forced to cut program
                            spending and postpone capital investments. For example, Yolo elimi-
                            nated its immunization services for children aged 3 through 5. Tehama
                            County closed four of its seven libraries and eliminated children’s
                            library educational services. Yolo doubled the expected service life of its
                            patrol car fleet. Tehama resorted to substituting used rental cars for
                            new patrol cars. Yolo suspended around-the-clock police patrols.
                            Tehama’s road maintenance and construction programs lapsed.




                            Page 4                          GAO/HRD99-96   Distressed   Cmnmunities   in California
                                    Executive   Summary




I   VVLUL   VV-L.V*VU
                        Cone
                          *
                             With   General-purpose targeted state aid is not a solution to the demographic,
Public Service Problems             social, or economic factors that underlie fiscal distress in poorer commu-
                                    nities. Past GAO work, however, shows that it can help. Such aid can
Largely on Their Own                offset federal aid losses and help to lessen the rate of decline in public
                                    services in poorer communities.’ In the absence of such a program, Yolo
                                    and Tehama counties and others like them must cope with their local
                                    public services problems largely on their own.


                                    GAO   is making no recommendations.
Recommendations

                                    GAO   did not ask for agency comments.
Agency Comments




                                    ‘Distressed Chnmunities: Public Services Declined in New Jersey Despite Targeted State Aid I GAO/
                                          _90 -96, July 9, 1990).



                                    Page 5                                    GAO/IlRDBB-95     Distressed   Chmnudties   in California
Contents


Executive Summary
Chapter 1
Background and          Local Governments Are Major Providers of Basic Public
                             Services
Introduction            After Rising for Two Decades, Federal Aid to Local                                      9
                             Governments Has Fallen
                        The Rise and Demise of GRS                                                          11
                        GRS Was an Important Source of Funds for Local Public                               12
                             Services, Yet Measuring Its Impacts Is Difficult
                        GRS Losses Are Especially Hard for Poorer Communities                               13
                             to Absorb
                        State-Local Strategies to Cope With Needs-Revenues                                  14
                             Imbalances
                        Objectives, Scope, and Methodology                                                  16

Chapter 2                                                                                                   19
Voter Initiatives and   Propositions 13 and 4 Limit Local Government Taxing                                 19
                             and Spending
State Mandates Strain   Revenue Limitations Burdened Counties the Most                                      20
Local Public Services   Increasing Mandated Costs Put Extra Pressure on Local                               21
in Poorer Counties in        Public Services
                        Conditions in Yolo and Tehama Counties Make It                                      23
California                   Especially Hard to Provide Local Public Services
                        GRS Was an Important Funding Source for Local Public                                27
                             Services in Poorer Communities

Chapter 3                                                                                                   29
Actions Taken by        Management Strategies Helped to Maintain Services
                        Raising Taxes and Increasing User Fees Were of Limited
                                                                                                            29
                                                                                                            30
Poorer Counties Had          Help
SomePositive, but       Yolo and Tehama Counties Cut Basic Programs and                                     31
                             Postponed Needed Capital Investments
More Negative Impact    Conclusions                                                                         32
on Public Services
Appendix                Appendix I: Major Contributors to This Report                                       34

Tables                  Table 1.1: Per Capita Federal and State Aid to Local                                11
                            Governments (Constant 1982 Dollars)


                        Page 6                         GAO/IUUH@B5   Distressed   Communities   in California
          Contents




          Table 2.1: Selected Socioeconomic Characteristics (Yolo                            23
              and Tehama Counties)

Figures   Figure 1.1: Percentage of Total Direct Expenditures for                                 9
               Selected Public Services, by Type of Government (FY
               1987)
          Figure 1.2: Trends in Federal Aid to Local Governments                             10
               (1973-87)
          Figure 1.3: Number of Counties Above or Below the                                  14
               National Per Capita Mean Income (1978 and 1987)
          Figure 1.4: Case Study of County Governments in                                    18
               California
          Figure 2.1: California County Governments Are Major                                22
               Providers of Welfare and Criminal Justice Programs
          Figure 2.2: Income of All Counties in California, and Yolo                         24
               and Tehama Counties (1970-87)
          Figure 2.3: Tehama and Yolo Counties Lag Behind                                    25
               Statewide Assessed Value Per Capita (1978-90)




           Abbreviations

                     Aid to Families With Dependent Children
                     general revenue sharing
                     Supplemental Security Income


           Page 7                         GAO/~So-95   Distressed   Communities   in California
Chapter 1

Background and Introduction


                      Local governments are the workhorses of domestic policy. However,
                      they do not carry out their responsibilities alone. In our federal system
                      of government, responsibilities are shared as well as divided. From the
                      1960s until the end of the 197Os, the federal government increased its
                      activity in local public affairs, expanding the number and scope of fed-
                      eral grants-in-aid programs and increasing grant funding. As a result,
                      general-purpose local governments, notably counties and municipalities,
                      became more dependent on the federal government. In the 1980s this
                      trend reversed as federal aid to local governments decreased substan-
                      tially. In particular, the Congress repealed the $4.6 billion-per-year gen-
                      eral revenue sharing (GRS)program. All local governments have had to
                      adjust to shrinking federal support. However, poorer communities have
                      higher public service needs but fewer resources of their own, circum-
                      stances that present them with greater difficulty in absorbing federal
                      aid cuts.


                      Apart from a very few programs, such as the administration of social
Local Governments     security, the federal government is not a direct provider of domestic
Are Major Providers   public services. Instead, the vast majority of these programs are imple-
of Basic Public       mented through a partnership among federal, state, and local govern-
                      ments. In this partnership, localities are the workhorses. In 1987, local
Services              governments led in direct spending for police and fire protection, sew-
                      erage and sanitation, parks and recreation, housing and community
                      development, air transportation, and libraries (see fig. 1.1).




                      Page 8                           GAO/HRINMb96   Distressed   Communities   in California
                                   Chapter       1
                                   Background         and Introduction




Expenditures for Selected Public
Services, by Type of Government    Percmtages        of Total Expenditures   for Each !Mviu
(FY1987)                           100

                                    90

                                    so

                                    70

                                    so

                                    50

                                    40

                                    30

                                    20

                                    10

                                     0




                                             1         1 Local

                                                         state

                                             m           Federal

                                   Source: GAO calculations           based on Bureau of the Census, Government Finances rn 1986-87



                                   American public opinion often favors keeping the provision of public
After Rising for Two               services close to the grassroots. Yet public opinion has also supported
Decades,Federal Aid                federal financial and regulatory intervention. Problems unresolved at
to Local Governments               lower levels of government have often spurred new federal initiatives.
                                   For example, national concern over inadequately attended urban
Has Fallen                         problems led the federal government to increase its involvement in local
                                   public affairs during the 1960s and 1970s. Grants-in-aid spending
                                   reflected these increased federal commitments to localities as aid rose
                                   steadily until 1978, as figure 1.2 shows.




                                    Page 9                                                GAO/HRD-90-95   Distressed   Communities   in (‘alifomia
                                                                Chapter 1
                                                                Background     and Introduction




Figure 1.2: Trends in Federal Aid to Local Governments (1973-87)
30       Conslant   1982 Dollars    in Bllllons

28

28




18

18

14

12

     r
10

         1973        1974          1979           1978   1877    1978        1979      1980       198l   1982       1983      1984      1985       1986      1987
         Fiscal Yeara

                                                                Source The Advisory Commlssion on Intergovernmental Relations, Significant Features of Fiscal Feder-
                                                                akm, 1981-82 EdItIon, 1988 Edition; and Bureau of the Census, Government Finances In 1986-87


                                                                In the 198Os, changing federalism policies favored an enhanced role for
                                                                states in the development and implementation of intergovernmental pro-
                                                                grams. These included some that had previously been federal-local pro-
                                                                grams.’ Additionally, federal budget priorities favored defense and
                                                                entitlement spending over programs for housing, economic development,
                                                                and infrastructure. Since the latter kinds of programs were predomi-
                                                                nantly federal-local, aid to localities declined between 1978 and 1986,
                                                                when measured in constant dollars. As a percentage share of total
                                                                municipal revenues, federal assistance dropped 55 percent from 1980 to
                                                                 1987. As a percentage share of total county revenues, federal aid
                                                                dropped 60 percent over the same period. As table 1.1 shows, GRS was
                                                                the most visible, but by no means the only program cut.’




                                                                ‘Block Grants: Overview of Experience to Date and Emerging Issues (GAO/HRD-8546, Apr. 3. 1985)
                                                                and Federal-State-Local Relations: Trends of the Past Decade and Emerging Issues (GAO./HRD-90-N
                                                                Mar. 22, 1990).

                                                                “GRS was enacted as the State and Local Fiscal Assistance Act of 1972 and reauthorized in 1976.
                                                                1980, and 1983. It expired for states in 1980, and local governments in 1986.



                                                                Page 10                                         GAO/HRD9@96      Distressed    Communities   in California
                                          Chapter 1
                                          Background      and Introduction




Table 1.1: Per Capita Federal and State
Aid to Local Governments
(Constant   1982 Dollars)                                                                                      Fiscal year            Percentage
                                                                                                               1980      1987             change
                                          Direct federal aid to local governments
                                          Total                                                            $120.07        $87.84                -44
                                          Public welfare                                                        1.36         1.63      -.___-     20
                                          Education                                                             9.49         545                -43
                                          General     revenue   sharing                                        25.94         8.60”              -67
                                          Hiahwavs                                                              0.68         0 97                    44
                                          Housinq     and community       development                          20.97        24.44                    17
                                          Health    and hospitals                                               1 .16        1 .05               -9
                                          Other                                                                60.47        25.69               -4
                                          State aid to local aovernmentsb
                                          Total                                                             $481.80 $474.93                           3
                                          Public welfare                                                       50.69        54.57                     8
                                          Education                                                           298.25       305 38                     2
                                          Highways                                                             23.51        22.73                -3
                                          Health and hosoitals                                                 11.87        13.53                    14
                                          Other                                                                77.48        78.71                     2

                                          Note: Dollar amounts are rounded. Percentage change IS computed usrng unrounded data
                                          aThe last quarterly revenue sharing payment was paid In October 1986. This figure rncludes a few quar-
                                          terly payments that some local governments received before the program exprred

                                          bMay rnclude federal aid passed to localities.
                                          Sources. Aid and U.S populatron from Bureau of the Census, Government Finances In 1979-80, Govern-
                                          ment Finances rn 1986-87, and Statistical Abstract of the Unrted States. The Implicit pnce deflator for
                                          state and local government purchases of goods and services IS from Bureau of Economrc Analysis.
                                          Survey of Current Busrness.




                                          GRSwas originally introduced as the fiscal centerpiece of the Nixon
The Rise and Demise                       administration’s “New Federalism.” This sweeping presidential initia-
of GRS                                    tive would have nationalized welfare through the Family Assistance
                                          Plan. It would have consolidated 129 grant programs (totaling $11.3 bil-
                                          lion) into 6 decentralized block grants. In addition, it would have created
                                          a $5 billion program of unrestricted intergovernmental aid-GRs-dis-
                                          tributed to virtually every state and local government in the United
                                          States.

                                          President Nixon advanced this package of general and special revenue
                                          sharing proposals during a period in which many prominent economists
                                          predicted that the federal government would soon experience large
                                          budget surpluses. However, sharing excess federal revenues was not the
                                          administration’s principal aim. Rather, as the President described his
                                          intentions in the 1971 State of the Union Address:


                                           Page 11                                      GAO/HRWW-96      Distressed     Communities   in California
                         Chapter      1
                         Background       and Introduction




                         “The time has come to reverse the flow of power and resources from the states and
                         communities to Washington, and start power and resources flowing back from
                         Washington to the states and communities, and, more importantly, to the people-
                         all across America.”

                         GRS served the aim of decentralization well because recipients were
                         given the broadest possible latitude to determine program spending.

                         Despite early congressional reservations, GRS was eventually enacted as
                         the State and Local Fiscal Assistance Act of 1972. Over its 14-year life,
                         GRS provided over $78 billion to over 39,000 state and local govern-
                         ments. Populous states, such as California, received as much as $8.6 bil-
                         lion in total aid, while rural states, such as Wyoming, received as little
                         as $164 million. As intended, GRS proved to be the least cumbersome and
                         among the most popular of all federal aid programs, from the perspec-
                         tive of recipients.

                         Although President Reagan shared President Nixon’s decentralization
                         goals, he gave higher priority to federal tax cuts and reducing domestic
                         spending than to sharing federal tax revenues with state and local gov-
                         ernments By 1985, mounting federal deficits convinced the administra-
                         tion that there were no federal revenues to share, and the Congress
                         agreed that ens-a nearly $5 billion line item in the federal budget-
                         was no longer viable. Neither the House nor the Senate fiscal year 1986
                         budget resolutions contained GRS funding, and the program ended on
                         schedule in 1986.


                         Virtually all evaluations of the GRS program concur that its funds were
GRSWas an Important      used predominantly to support local public services and capital invest-
Source of Funds for      ments. For example, according to official use reports submitted to the
Local Public Services,   Department of the Treasury, GRS primarily helped to maintain or
                         improve local public services. A Brookings Institution monitoring study
Yet Measuring Its        identified county spending on public transportation, such as roads. high-
Impacts Is Difficult     ways, and mass transit subsidies, as the program category most signifi-
                         cantly affected by GRS. Public safety (that is police, fire, and corrections)
                         ranked next among identifiable spending categories, followed by capital
                         spending in primary and secondary education. Among municipalities,
                         public safety spending was most affected. Public transportation and
                         environmental protection (that is sewerage, sanitation, and water
                         supply) ranked next. Because funds supported essential public services
                         and because poorer communities received relatively more funds per




                         Page 12                             GAO/HRIMO-96   Distressed   Communities   in (‘alifornia
                      Chapter 1
                      Background   and Introduction




                      capita than their wealthier neighbors, GRS was a particularly                     valuable
                      resource for fiscally distressed communities.

                      These observations notwithstanding, precisely identifying the effects of
                      GRS on  spending priorities in the communities we visited was difficult
                      because the GRS funds were unrestricted.” That is these funds could be
                      spent for any purpose that the local government could legally spend its
                      own revenues for, making GRS dollars virtually indistinguishable from
                      local revenues. We can, therefore, report the impacts of GRS funds on
                      local public services as described by local officials in the communities
                      we visited. We cannot, however, link the loss of GRS dollars to public
                      service problems with precision. This does not mean that general conclu-
                      sions about the impact of the program’s expiration cannot be drawn.
                      While GRSwas not a large part of most local government budgets,
                      including Yolo and Tehama, losses were one factor contributing to gen-
                      eral fiscal pressures that caused the public service problems we
                      observed.


                      Fiscal disparities characterize the situation in which different communi-
GRSLossesAre          ties must tax their citizens and businesses at different levels to obtain
Especially Hard for   similar public services. Such disparities occur because neither the fiscal
Poorer Communities    circumstances nor the need for public services are uniform across com-
                      munities. This makes it harder for poorer communities to provide ade-
to Absorb             quate public services on their own. Often communities with the greatest
                      needs have the least resources to meet them. In poorer communities,
                      even very high tax rates can fail to produce revenues sufficient to meet
                      service needs. Yet when tax rates are already high relative to sur-
                      rounding localities, raising them is likely to exacerbate existing
                      problems of middle-class flight and declining business investment.

                      Nationwide, these kinds of needs-revenues imbalances grew over the
                      past decade. The number of counties where per capita income was below
                      70 percent of the national average rose from 711 to 871 between 1978
                      and 1987, a 22-percent increase. (See fig. 1.3.) In contrast, the number of
                      counties where per capita income was above 130 percent of the national
                      average rose from 54 to 72, a 33-percent increase. Moreover, popula-
                      tions have become larger in both wealthier or poorer counties in the


                      %ee, for example, Catherine Lovell, “Measuring the Effects of General Revenue Sharing: Somr Alter-
                      native Strategies Applied to 97 Cities,” Revenue Sharing, David Caputo, ed. Lexington, Mass D C
                      Heath and Co., 1976. pp. 49-65.



                      Page 13                                   GAO/HRD-W95
                                                                          Di&ressed Communities in California
                                          Chapter 1
                                          Background          and Introduction




                                          United States. Proportionally,                           fewer people lived in middle-income coun-
                                          ties in 1987 than in 1978.


Figure 1.3: Number of Counties Above or
Below the National Per Capita Mean
                                          Number       of Counfies
Income (1978 and 1987)




                                                                                                      12&130%           Abwo   130%
                                                   Porconfago        of Par   CapitaMean   Irwmo


                                                   1         1 1978
                                                                1987

                                          Source: U.S. Department of Commerce, Bureau of Economic Analysis.



                                          Like all governments, poor communities can choose from a variety of
State-Local Strategies                    coping strategies when public service needs exceed available resources.
to Cope With Needs-                       Management improvements that deliver services more efficiently and
RevenuesImbalances                        effectively help to maintain services with less revenue. Raising taxes is
                                          another option. In poorer communities, where tax bases are weak, this
                                          strategy is not without substantial costs to residents. It also can promote
                                          middle-class flight and exacerbate declining business investment. Other
                                          strategies-especially   delays in infrastructure repair or construction or
                                          budget cuts in program staff or services-can produce a decline in
                                          public services.




                                          Page 14                                                  GAO/HRIMO-95   Distressed   Communities   in (‘alifwnia
Chapter 1
Background   and Introduction




States can help poorer communities when local needs exceed local reve-
nues. Because of their superior constitutional positions, states have
always been an important factor in shaping local government. To
varying degrees, states dictate local government structures and services,
control local revenue raising, and supervise administration of local pro-
grams. States also have the power to affect equity, effectiveness, effi-
ciency, and accountability in local government institutions and public
services.

Some state policies make it more difficult for communities to meet their
basic public service responsibilities. Tax and expenditure limitations can
constrain service delivery by virtue of the fact that they limit available
revenues. Unreimbursed state-mandated programs may also cause
problems. Other state policies can help. State assumption of services
lifts responsibility from the shoulders of local governments, including
poorer communities. Through mandate reimbursement, states can com-
pensate localities for the costs of oversight and administration of state
regulations. Targeting reimbursements can reduce certain mandated
costs that fall heavily on poorer communities.-’

Most directly, states can help poorer communities to meet their public
service responsibilities, as well as to lessen the negative impacts of
declining federal aid, through their grant-in-aid systems. During the
1980s when federal aid decreased, state aid to local governments
increased-on average from $462 to $475 per capita (constant 1982 dol-
lars). However, most of this growth was in education, health. and crim-
inal justice programs-areas in which federal aid was not substantial
compared to state aid (for example, education) or where federal aid did
not decline as much (for example, health). Meanwhile, local revenue
raising outpaced aggregate increases in state aid during the 1980s. Thus,
in 1980, states provided 33 cents for every dollar of own-source munic-
ipal revenues. In 1987, this figure was 29 cents. Similarly, in 1980 states
provided 64 cents for every dollar of county own-source revenues. Yet,
in 1987, this figure was 50 cents. Other research we have done shows
that, by and large, general state aid to local governments has not been




‘Legislative Mandates: State Experiences Offer Insights for Federal Action (GAO:HRD-HH-7.5
Sept. 27, 1988).



Page 15                                  GAO/HRLHO-95      Distressed   Communities   in (‘alifomia
                         Chapter 1
                         Background   and Introduction




                         targeted to poorer communities.’ Because aid is predominantly distrib-
                         uted on a per capita or return-to-place-of-origin basis,” poorer communi-
                         ties continued to receive less aid than their wealthier or larger neighbors
                         during this period.


                         Our objectives in reporting on public services in poorer communities
Objectives, Scope, 2LI-d weretodetermine:
Methodology
                       . the condition of local public services in light of reductions in direct fed-
                         eral assistance to local governments and the expiration of GRS;
                       . the range of local government responses to these conditions, and
                       . whether state policies and actions have helped to offset public service
                         problems.

                         To accomplish our first objective we reviewed trends in direct federal-
                         local aid and drew from our earlier research on trends in the intergov-
                         ernmental system. We then visited poorer communities in three states.
                         We collected data on public services from local sources and state docu-
                         ments and interviewed local officials to gain insights into local trends
                         and conditions.

                         To accomplish our second objective we examined local budgets and
                         other relevant financial documents. We also spoke with public officials
                         and others knowledgeable about the strategies that communities used to
                         cope with their fiscal stress and declining federal aid.

                         To accomplish our third objective we examined state aid and other state
                         policies to determine whether states that we visited had replaced GRSor
                         otherwise taken steps to lessen the negative impacts of declining
                         federal-local aid and the expiration of GRS.

                         We visited communities in California, New Jersey, and Texas. We
                         selected states and chose field sites that were different along dimensions
                         of state-local relations that we believed would help to explain variation
                         in local public service conditions. Differences we considered included
                         variations in the types of services provided at state versus local levels,

                          %xnmunities in Fiscal Distress: State Grant Targeting Provides Limited Help (GAO/HRD-90-69,
                          Apr. 13, 1990).

                          “Transfers of state funds to local governments on a return-Wplaceof-origin basis are also called
                          “distributions on a source basis” or “shared taxes,” although the latter term is sometimes used more
                          narrowly in reference to specific portions of state taxes distributed back to the local government
                          where the taxes were collected.



                          Page 16                                    GAO/HRD-9@95      Distressed Communities in California
-
    Chapter 1
    Background   and Introduction




    taxing and spending limitations states place on local governments, state
    mandating policies, and patterns of state aid to local governments.
    Within states, we selected communities that were among the more fis-
    cally distressed and that had higher-than-average service needs? as indi-
    cated by socioeconomic and other statistical indicators.

    This case study is on Yolo and Tehama counties! two of California’s
    more distressed communities. (See fig. 1.4). We also visited one
    wealthier community in California. This visit provided a better basis for
    assessing conditions in poorer communities. However, because wealthier
    local governments were not the focus of our work, we did not include
    information on them in our report.

    We carried out our work between September 1988 and December 1989 in
    accordance with generally accepted government auditing standards.




    Page 17                         GAO/HRD-90-95   Distressed   Communities   in (‘alifomia
                                                                                                                                    -
                                           Chapter 1
                                           Background   and Introduction




Figure 1.4: Case Study of County Governments in California
I




                                                                      Tehema




                                            Page 18                            GAO/HItD~96   Distreseed   Conununlties   in California
Voter Initiatives and State Mandates Strain
Local Public Services in Poorer Counties
in California
                        The passage of two voter initiatives in 1978 and 1979-Propositions       13
                        and 4-affected the fiscal condition of all levels of California govern-
                        ment. However, the impact of these revenue and expenditure limitations
                        on poorer counties in California had been especially serious.1 Poorer
                        counties have greater public service needs, but fewer resources of their
                        own. In these circumstances general revenue sharing was an important
                        source of funding for local public services, helping to finance essential
                        programs and needed capital investments in both Yolo and Tehama
                        counties-two    poorer counties that we visited. While the expiration of
                        GRS in 1986 did not cause Yolo’s and Tehama’s fiscal problems, it added
                        to them.


                        In the late 197Os, citizen concern about the level of taxation and govern-
Propositions 13 and 4   ment spending in California launched a grassroots political movement
Limit Local             known as the “taxpayer revolt” and resulted in the passage of Proposi-
Government Taxing       tions 13 and 4. These measures work together as a comprehensive
                        strategy for constraining the growth of government in California. Pro-
and Spending            position 13 reduced property tax revenues statewide by capping the
                        nominal property tax rate at 1 percent of assessed valuation; rolling
                        back assessed values to their 1975-76 levels; and by limiting annual
                        increases in assessed valuations to no more than 2 percent, except when
                        property is exchanged or transferred.” Proposition 4 conditions
                        increases in state and local government spending on increases in popula-
                        tion growth and the cost of living via a statutory formula.




                        ‘In California, municipal governments are designated cities or towns, functioning as either charter
                        cities or general law cities, As of January 1987, there were 442 municipal governments in California.
                        Since 1907, the state has had 58 counties, including San Francisco, which is considered to be both a
                        city and a county. Counties are responsible for most welfare services, health and hospitals. JudlCiai
                        and correctional services, and numerous regulatory programs. They also offer municipal-type ser-
                        vices, such as poke, fire, and zoning, to unincorporated areas within the county.

                        ‘John J. Kirlin and D.R. WinkIer, eds., California Policy Choices, Vol. IV (Sacramento. Cahf School of
                        Public Administration, University of Southern California, 1988).



                        Page 19                                     GAO/lIRIMO-96     Distressed   Communities   in California
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                           Voter Initiatives and State Mandates Strain
                           Local Public Services in Poorer Counties
                           in California




                           Since its passage in 1978, Proposition 13 has been especially difficult for
Revenue Limitations        California counties because it affected their primary and traditional rev-
Burdened Counties the      enue sources. Counties rely heavily on property taxes? In contrast,
Most                       municipalities have a more diverse revenue structure, including greater
                           access to revenues from sales and other taxes and user fees. In 1978,
                           property tax revenues comprised 67 percent of county own-source reve-
                           nues, but only 33 percent of municipal own-source revenues.

                           Proposition 13’s impact on county finances was swift and significant.
                           Between 1978 and 1979, county property tax revenues dropped 52 per-
                           cent statewide, and they remain depressed. Property taxes were 36 per-
                           cent of all Yolo County revenues in 1978. They were 14 percent in 1988.
                           Property taxes were 30 percent of these revenues in Tehama County in
                           1978, but 15 percent in 1988. Meanwhile, other forms of revenue
                           raising, such as sales taxes and user fees, did not grow. These taxes and
                           fees held at about 11 percent of total county revenues between 1978 and
                           1988. In contrast, they continued to rise as a share of municipal reve-
                           nues, from 34 percent in 1978 to 63 percent in 1988.


County Service             Counties have a wider range of service responsibilities than other local
Responsibilities Include   governments in California. They take primary responsibility for
                           (1) implementing many state programs and (2)providing local public ser-
Some County and            vices to unincorporated areas within their jurisdictions.
Municipal Functions
                           Historically, California counties-like  most counties in the United
                           States-were created to serve as “administrative arms of state govern-
                           ment.” For example, they collected taxes and administered courts on
                           behalf of the state. Current county administration of state welfare and
                           criminal justice programs also reflects this assignment of responsibility.
                           Additionally, counties provide an increasing variety of services tradi-
                           tionally considered municipal responsibilities. Countywide services
                           include solid-waste dumps, public health, and libraries.




                           “Counties have access to the real property tax (limited by Proposition 13 as described later m thus
                           chapter) and several other taxes that generate smaller revenue amounts. These other taxes include:
                           (1) sales and use taxes (permitted by state law up to 1.25 percent of taxable sales in unincorporated
                           areas, (2) property transfer taxes on the sale of real property, (3) transient occupancy taxes on hotel
                           and motel occupancy in unincorporated areas, and (4) ad valorem taxes on aircraft and timber yield.
                           Counties can impose fees and charges for services provided, but these are limited to the costs cbf
                           providing services. They also can have revenues from county-owned enterprises, such as airports.
                           hospitals, transportation, and refuse collection and disposal.



                           Page 20                                     GAO/HRD-99-95 Distressed       Communities    in California
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                      Voter Initiatives and State Mandates Strain
                      Local Public Services in Poorer Counties
                      in California




                      California counties also must deliver local public services to county
                      residents who live in unincorporated areas4 Notable among these are
                      police and fire protection, land-use planning, and parks. Overall, about
                      20.7 percent of California’s population lives outside municipal bounda-
                      ries In some counties, local public service responsibilities to serve unin-
                      corporated areas are more substantial. For example, in rural counties,
                      such as Calavaras and Tuolumne, over 90 percent of the population
                      lives in unincorporated areas. Thirty of California’s 58 counties have
                      more than 50 percent of their populations living in unincorporated
                      areas.


                      Between 1978 and 1988, population growth, state and federal policies,
Increasing Mandated   and court decisions increased spending for mandated welfare and crim-
Costs Put Extra       inal justice programs by $6.5 billion in California. In the past, the state
Pressure on Local     paid a large share of the costs of many of these mandated programs.
                      Local governments paid for other essential local public services, such as
Public Services       police and fire protection, almost totally from their own revenues. They
                      also paid for optional programs, such as libraries, parks, recreation, and
                      cultural activities.

                      During the 198Os, in California, state aid failed to rise as fast as the
                      costs of providing mandated services at the county level. Consequently,
                      an increasing share of the costs of state-mandated programs fell on
                      counties, at the same time they continued to pay for the other essential
                      local public services. As a result, poorer counties have had difficulty
                      keeping up. In Yolo County, some welfare caseloads have nearly doubled
                      since 1984.” Between 1982 and 1986, the Tehama County Department of
                      Social Welfare’s Aid to Families With Dependent Children (AFDC)
                      caseload increased 48 percent, but staff increased only 11 percent. As a
                      result, the department no longer visits homes to verify information on
                      the AFDC applications. Nor does it perform one-on-one introductory
                      meetings with first-time recipients. Tehama County refers significantly
                      fewer fraud cases to state agencies than it has in the past because eligi-
                      bility workers do not have the time to verify the legitimacy of welfare
                      applications or recipient status.




                      “Unincorporated areas are areas outside municipal boundaries, but inside county lines.

                      ‘These include county-administered General Assistance, Medical, and AFDC foster care programs



                      Page 21                                    GAO/HRD90-98      Distressed   Communities    in California
                                        Chapter 2
                                        Voter Initiatives and State Mandates Strain
                                        Local Public Services in Poorer Counties
                                        in California




                                        The Yolo County Public Defender’s caseload has also increased faster
                                        than local resources. Between 1985 and 1988, felonies and misde-
                                        meanors increased 24 percent, resulting in an attorney-client caseload
                                        ratio of 1 to 689 in 1988. Lacking resources to prosecute many of these
                                        crimes, Yolo County resorts to more out-of-court settlements.

                                        The growing gap between state-mandated costs and state aid has placed
                                        even greater pressure on local public services. Mandated costs must be
                                        paid first. Local public services are financed from remaining revenues.
                                        According to a 1987 survey by the County Supervisors Association of
                                        California, an estimated 85 percent of counties’ locally raised revenues
                                        would be used to finance state-mandated programs. As a result of these
                                        trends, counties led both states and municipalities in per capita spending
                                        on welfare and criminal justice. (See fig. 2.1.)


Figure 2.1: California County
Governments Are Major Providers of
                                        240   Per Caplla Spending
Welfare and Criminal Justice Programs




                                               Pubtk Wolfare            Cfimlnal
                                                                        JlUth

                                               1      1 StateGovernment
                                                        County Government
                                                        Munidpalities

                                         Note: San Francisco is Included with municipalities. It has no overlying county government
                                         Source: GAO calculations based on Bureau of the Census, Government Finances tn 1986-87




                                         Page 22                                    GAO/HRBW95        DIstressed   Communities   in California
                                    Chapter 2
                                    Voter Initiatives and State Mandates Strain
                                    Local Public Services in Poorer Counties
                                    in Califomia




                                    All counties have wrestled with the combination of revenue constraints
Conditions in Yolo and              and rising costs of state-mandated programs. Poorer counties, however,
Tehama Counties                     have been more adversely affected because they have greater needs, but
Make It Especially                  fewer resources of their own.
Hard to Provide Local
Public Services

Yolo and Tehama Have                Yolo County (1988 population of 133,500) lies in the Sacramento Valley,
                                    northeast of San Francisco. Over 70 percent of the county’s acreage is
Greater Needs                       farmland, and agriculture has been Yolo’s economic mainstay. In 1986-
                                    the year GRSexpired-37 percent of the county’s population lived in
                                    unincorporated areas. Tehama County (1988 population of 46,731) is
                                    about 130 miles north of Sacramento, in the northern-most part of the
                                    Sacramento Valley. Over 60 percent of the county’s acreage is farmland,
                                    and another 27 percent is government owned. Lumber and agriculture
                                    have been Tehama’s economic mainstays. Sixty-two percent of Tehama
                                    residents live in unincorporated areas.

                                    Larger-than-average unincorporated populations indicate that Yolo and
                                    Tehama counties have higher local public service responsibilities than
                                    other California counties. Socioeconomic and other indicators listed in
                                    table 2.1 show this greater need.

Table 2.1: Selected Socioeconomic
Characteristics (Yolo and Tehama                                                                      State         Tehama                 Yolo
Counties)                           Mortality    rate                                                    7.6             10.2                6.9
                                    Unemployment            rate                                         5.3%             8.5%               6.6%
                                    Violent     crime rate                                              469               509               619
                                    AFDC recipients                                                      65%              9.8%               77%
                                    Income      below      poverty                                     11.4%             12.9%              15.9%
                                    Hispanic      origin                                                 9.5%             5.5%              17 1%
                                    Lacking      high school diplomaa                                  26.5%             30.5%             26.5%
                                    Supplemental           Security   Income (SSI) recipients            2.6%             3.7%               2.5%
                                    65 years of ape or older                                           10.2%             14.4%               8.7%

                                    Note. Statewide data are averages except for the vrolent crime rate and Hispanic populatron, whtch are
                                    median values. Violent cnme rate and mortality rates are expressed per 100,000 populatron Mortalrty IS
                                    for 1984, unemployment for 1988. vrolent crime for 1985, SSI for 1986, income and poverty data based
                                    on 1979 rncome from the 1980 census (the latest available). All other data are for 1980
                                    aPercent of populatron aged 25 and older with less than 12 years of education.
                                    Sources Unemployment and AFDC recipients are from state data. All other data are from Bureau of the
                                    Census, County and City Data Book, 1988 and the 1980 census




                                    Page 23                                             GAO/HRD9@96   Distressed   Communities   in California
                                                               Chapter 2
                                                               Voter Initiatives and State Mandates Strain
                                                               Local Public Services in Poorer Counties
                                                               in California




Yolo and Tehama Have                                           Compared to the average county in California, Yolo and Tehama are
Fewer Resources of Their                                       counties with fewer resources of their own. Economic growth in the two
/\-.,
VW11
                                                               counties consistently lagged behind statewide growth in the 1980s.
                                                               Weak local economies, in turn, reduced the value of resources Yolo and
                                                               Tehama counties rely on.

                                                               In 1978, California per capita personal income was $9,411. In Yolo and
                                                               Tehama per capita personal incomes were $8,791 and $7,184, respec-
                                                               tively. Already in economically disadvantaged positions, the counties
                                                               lost ground in the 1980s. California per capita income rose 90 percent
                                                               between 1978 and 1987. Per capita income grew at a slower rate in Yolo
                                                               and Tehama-63 and 84 percent, respectively. Slower growth meant
                                                               that both counties lost ground relative to the state average, as figure 2.2
                                                               shows. In Tehama County, the relative decline was so substantial that,
                                                               by 1987, per capita income was only 66 percent of the state average.



Figure 2.2: Income of All Counties in California, and Yolo and Tehama Counties (1970-87)
110    Pofsonal    Income   Per Capita as a Percentage   of Stat0


                                       -4. **---I.       *or
100
                                l *.                            -* wrr--**
                                                                                 l * *.I--
      I- *z--. --.,* l *                                                                     ----..--
                                                                                                               -2..
                                                                                                                        -. ---..                      *..I....          L.IL-I..
 90                                                                                                                                   -I -9..    .-




  1979      197l       1972       1972       1974    1975        1978     1977       1979    1979       1999          1981     1992       1992        1994       1999       1989       1997
  YUIW

         -         All Countks
         mm--      YdocOunty
         m         Tehama County

                                                               Values In the chart are expressed as a percentage of the state average. “All Counties”                   IS the slate
                                                               average and equals 100.
                                                               Source U S Bureau of Economic Analysis




                                                                Page 24                                           GAO/HR.D90-95          Distressed     Communities        in California
                                                                  Chapter 2
                                                                  Voter Initiatives and State Mandates Strain
                                                                  Local Public Services in Poorer Counties
                                                                  in califomia




                                                                  Property taxes are the major source of county tax revenues. Thus, lag-
                                                                  ging growth in Yolo and Tehama counties’ tax bases may be even more
                                                                  important than their disadvantages in per capita personal income. In
                                                                  1978, total assessed valuation per capita was $19,100 in California. That
                                                                  year Yolo and Tehama totals were similar-$20,800     and $19,100. By
                                                                  1990, however, significant disparities appeared (see fig. 2.3). While the
                                                                  California average was $48,800, Yolo’s assessed valuation per capita
                                                                  was $39,300. In Tehama this total was $34,900.

                                                                  Lagging assessments caused property tax revenues to remain depressed.
                                                                  Statewide, county government property taxes per capita grew 17 per-
                                                                  cent from 1978 to 1988. Yet, they decreased by 19 percent in Yo10.‘~
                                                                  These revenues grew by only 6 percent in Tehama County.



Figure 2.3: Tehama and Yolo Counties Lag Behind Statewide Assessed Value Per Capita (1978-W)
115         Porcenl of Statmlde Aaaeaaed Value Par CaNta
110          __
                   --          L
105                                          ‘_
1%                 - - -1.1.       ..-1.1.        :- ..-,-
                                                     \   ---:\.
                                                                         1,.     I          m .-          ~~
 95                                                                            ,cLI -              ----:;,,q\

 90                                                                                                                     - - .-
                                                                                                                                 l . --.

 85                                                                                                                                        --Z.   -..-       -::-:-::-:-::1.
 60                                                                                                                                                       --..
                                                                                                                                                                       -4..
                                                                                                                                                                                -.
 75                                                                                                                                                                                   -c
                                                                                                                                                                                           -.
                                                                                                                                                                                                --.
 m
 65
 60
     1978               1979          1999           1981         1992               1993          1994         19%       1999             1997          lgee                  1%9                1999

     Pieoal Yearn

            -           State Average
            m-m-        TehamaCounty
            m           Yolo County

                                                                   Source US Bureau of the Census and the Califorma State Board of Equakatlon.




                                                                   “The incorporation in 1986 of West Sacramento in Yolo County partly explains this decrease



                                                                   Page 25                                            GAO/HRD9@96           Distressed   Communities                 in California
                                 Chapter 2
                                 Voter Initiatives and State Mandates Strain
                                 Local Public Services in Poorer Counties
                                 in California




                                 Lagging property tax revenues stem mostly from economic factors and
                                 Proposition 13. However, in Yolo and Tehama counties, these statistics
                                 are also the result of state policies designed to safeguard California
                                 farmlands. In particular, the Williamson Act of 1967 prevents counties
                                 from assessing farmland at full market value. This tax subsidy is
                                 offered in exchange for owners’ commitments not to develop their
                                 properties. Yet, local governments bear a financial burden as a result.
                                 Tehama County lost about $1.3 million in 1987, or about 4 percent of its
                                 budget. Similarly, Yolo lost about $25 million in 1988, or about 3 per-
                                 cent of its budget.

Revenue and Expenditure          Revenue and expenditure data help to illustrate the consequences of
                                 concentrated demographic, social, and economic problems.’ Some statis-
Trends Indicate That Local       tics from Yolo and Tehama Counties illustrate relative or absolute
Public Services Are              declines in local public services. For example, based on the most recent
Declining                        available data:

                             . Expressed in constant dollars, property tax revenues per capita
                               increased 27 percent for all counties between 1981 and 1988. They
                               decreased 8 percent in Yolo, and increased by 3 percent in Tehama.
                             . Average county per capita (constant dollar) spending for police and fire
                               services in California was unchanged between 1981 and 1988. This
                               spending, however, fell 58 percent in Yolo and 8 percent in Tehama.
                             l Between 1981 and 1988, per capita (constant dollar) expenditures for
                               public ways and facilities fell an average of 12 percent among county
                               governments statewide. Comparable data show declines of 26 and 36
                               percent in Yolo and Tehama counties, respectively.
                             l Between 1981 and 1988, per capita (constant dollar) recreation and cul-
                               tural spending dropped 13 percent among counties statewide. This
                               spending, however, fell 35 percent in Yolo and 49 percent in Tehama.
                             l Statewide county per capita (constant dollar) spending for library ser-
                               vices rose 9 percent between 1981 and 1988. In Yolo spending for
                               county libraries declined 4 percent. In Tehama it fell 57 percent.




                                  ‘Service outputs (for example, the degree of police services provided) cannot be measured directly.
                                  Constant dollar expenditures per capita is a rough proxy for output because a wide variety of state
                                  and local policy and administrative actions change expenditures from year to year.



                                  Page 26                                    GAO/HRDW95        Distremed   Communities in California
                            Chapter 2
                            Voter Initiatives  and State Mandates Strain
                            Local Public !3ervices in Poorer Counties
                            in California




                            As the gap between service costs and available revenues widened, all
GRSWas an Important         California counties grew more dependent on intergovernmental aid. As
Funding Source for          federal aid declined state aid increased. However, the loss of GW grants
Local Public Services       was especially important in poorer counties because-unlike most state
                            aid-funds could be used for local public services. While GRSwas not
in Poorer Communities       adequate to solve the growing fiscal problems of counties, such as Yolo
                            and Tehama, it helped to fund capital investments and essential
                            services.


Shifting Aid Patterns and   Constrained property tax revenues caused intergovernmental aid to rise
Growing Dependence          as a share of total county revenues over the 1978-88 period. For
                            example, in 1978 intergovernmental grants-in-aid were 47 percent of
                            total revenues in Yolo and 54 percent in Tehama. In 1988, these percent-
                            ages were 71 and 64, respectively.

                            Over this lo-year period federal aid declined and state aid increased in
                            California. Thus, while state aid amounted to 47 percent of all intergov-
                            ernmental aid to counties in 1978, it was 66 percent in 1988. Growing
                            state aid did not help counties to provide all local public services, how-
                            ever. This was because about two-thirds of all state-county aid was
                            restricted and could only be spent on welfare, health, and criminal jus-
                            tice programs.

                            Like most states, California does not have a program of general-purpose
                            fiscal assistance targeted to its poorer communities. Such programs are
                            not a solution to the demographic, social, or economic factors that
                            underlie fiscal distress in poorer communities. Our past work, however,
                            has shown that these programs can help. They can offset federal aid
                            losses and help to lessen the rate of decline in public services in poorer
                            communities.


GRS Supported Basic         In its peak year, 1980, GRSprovided $291 million to California counties.
                            Statewide, county per capita revenue sharing averaged $7.93 in 1986. In
Programs and Capital        contrast, poorer counties received relatively more. GRS provided $14.66
Investments
- _         in Yolo and     per capita in aid to Tehama County and $11.72 to Yolo. Until the pro-
Tehama Counties             gram expired, Yolo County had been receiving an average of $1.8 million
                            annually. This was 2.9 percent of total revenues and 13.4 percent of all
                            federal aid.

                            How were these funds spent? Based on our interviews with local offi-
                            cials, it appears that the counties initially spent a large share of then


                            Page 27                                    GAO/HRlNO-95   Distressed   Communities   in (‘alifomia
Chapter 2
Voter Initiatives and State Mandates Strain
Local Public Services in Poorer Counties
in California




grants on discretionary programs. Later, as fiscal pressures mounted,
Yolo and Tehama shifted GRS funding from these kinds of optional pro-
grams and public works improvements to needed capital investments
and basic services.

In the 1970s nationwide, most counties budgeted GRS funds to one-time
capital projects. Similarly, during this period Yolo and Tehama counties
reported using GRS funds on one-time or discretionary capital invest-
ments-notably jail, park, and fairground improvements. Then, in the
early 198Os, Yolo and Tehama counties began to concentrate a greater
share of their GRS grants on capital projects with more widespread bene-
fits. For example, Yolo completed construction of its administration
building with GRS funds. Similarly, Tehama renovated an abandoned
Safeway store, transforming it into a library. From 1983 to 1986, Yolo
and Tehama faced declining fiscal conditions at a time when the
national economy was expanding. During this period of mounting fiscal
pressures, they devoted their GRS grants to program operating costs. For
example, Yolo County reported using GRS to help pay operating costs of
law enforcement. Tehama County reported using it to help pay Sheriff
and Sanitation Department operating costs8




*Evaluators of GRS have identified these kinds of local capital and operating expenditures as “substi-
tution” effects because they provide opportunities to reduce local spending, increase fund balances.
and cut tax rates. However, in Yolo and Tehama counties, local public services were seriously
strained, tax rates were at their legal limits, and fund balances were being drawn down.



Page 28                                     GAO/HID-W95       Stressed    Communities    in California
Chapter 3

Actions Taken by Poorer Counties Had Some
Positive, but More Negative Impact on
Public Services
                                California did not take steps to offset the loss of general revenue
                                sharing. Nor did the state take other actions to offset existing fiscal
                                pressures associated with Proposition 13 in poorer counties. Before and
                                after the expiration of GRS in 1986, Yolo and Tehama counties used all
                                four strategies described in chapter l-improved      administration,
                                increased revenues, reductions in program spending, and postponement
                                of capital investments- to cope with their fiscal distress and declining
                                federal aid. Because administrative improvements and increased reve-
                                nues were insufficient, the techniques Yolo and Tehama were forced to
                                fall back on were spending cuts and postponement of capital
                                investments.


                                Yolo and Tehama counties helped to maintain existing services with less
Management                      revenues by improving program administration and operations. They
Strategies Helped to            also drew down cash reserves to maintain existing local public service
                                spending, but this strategy has nearly exhausted the cash reserves.
Maintain Services

Increased Economy and           Yolo and Tehama counties adopted cost-saving measures to promote
                                economy and efficiency in program operations. These included substi-
Efficiency                      tuting volunteers for paid staff, reorganizing operations, and updating
                                communications equipment. For example:

                        l In Tehama, a staff of 40 volunteers now do work formerly accomplished
                          by two full-time county library employees. According to the county
                          librarian, even the current limited level of services could not be pro-
                          vided otherwise.
                        . In the Tehama Sheriff’s Department, a volunteer staff of about 25 works
                          in the administrative office and administers crime prevention programs.
                        . The Yolo County Jail saved an estimated 21 percent of its yearly oper-
                          ating costs by replacing deputies with civilian correctional officers.
                          Yolo County outfitted its police patrol vehicles with cellular telephones
                            l


                          and dictation equipment. Staff are thus able to remain in their vehicles,
                          while also attending to administrative matters.
                        . By combining operations with three municipalities, Yolo reduced emer-
                           gency dispatch operating costs 19 percent-from      about $560,000 to
                           $455,000.




                                Page 29                         GAO/HRD9O-95   Distressed   Communities   in California
                                Chapter 3
                                Actions Taken by Poorer Counties Had Some
                                Positive, but More Negative Impact on
                                Public Services




Reserves Tapped and             Yolo and Tehama counties drew down their reserves and general fund
Funds Transferred               balances. The counties, however, have nearly exhausted this strategy.
                                For example:

                            l   Tehama County reduced general fund cash reserves by 98 percent
                                between 1982 and 1988. Since 1984, the county has maintained a very
                                small reserve of $2,000 reserve, less than 0.01 percent of Tehama’s 1988
                                general fund budget.
                            l   Yolo County drew down its general fund reserves by 16 percent between
                                1982 and 1988. In 1988, Yolo cash reserves totaled almost $2 million, or
                                2 percent of the general fund budget. In 1989, the county transferred
                                about $600,000 from its capital fund to its general fund, and it drew
                                down more than $400,000 from general reserves.


                                Raising taxes and user fees can help stave off reductions in local public
Raising Taxes and               services. However, in Yolo and Tehama counties, voters have not been
Increasing User Fees            inclined to support tax increases, and increases in user fees have been
Were of Limited Help            modest.



Taxes Were Not Raised           In California, the statewide sales and use tax rate is 6 percent. If voters
                                approve, however, local governments may increase these rates by up to
                                1.O percent. Thus far, only 9 of 58 counties in California have gained
                                voter approval to raise these taxes. These counties generally earmarked
                                revenues for highway or other transportation construction, repair, or
                                improvement projects. Neither Yolo nor Tehama County has sought a
                                sales tax rate increase since the passage of Proposition 13.


User Fees Provided Little       Counties may also turn to user fees, although such fees have provided
                                some help in Yolo and Tehama Counties, revenue increases have been
Help                            modest. Further, local officials in Yolo County told us that the county is
                                now charging the maximum fees for services permissible by law.

                                Yolo County added to its revenues by increasing court fees recording
                                fees, and road and street services. However, these are activities where
                                service demands are modest. As a result, service fee revenues increased
                                from a modest 2 to 5 percent as a share of total revenues between 1978
                                and 1988. Tehama County increased user fee revenues from 4 percent of
                                total revenues in 1978 to 5 percent in 1988.




                                Page 30                               GAO/HRD-So-96   Distressed   Communities   in (‘alifornia
                                  Chapter    3
                                  Actions   Taken by Poorer Counties Had Some
                                  Positive, but More Negative Impact on
                                  Public Services




                                  While Yolo and Tehama counties used management improvements and
Yolo and Tehama                   revenue raising strategies to cope with general fiscal distress and the
Counties Cut Basic                loss of GRS,these strategies proved inadequate as budget pressures
                                  mounted. Thus, constrained revenues and mounting work loads forced
Programs and                      both counties to rely heavily on cuts in program operations and post-
Postponed Needed                  ponement of capital investments. For example:
Capital Investments
                      . Yolo County now rations low-income children’s routine checkups and
                         immunizations. In the past all children under 6 years of age received
                         these services. Now, only children under 2 years old are served.
                      . In January 1983, 17 Tehama County Sheriff’s deputies patrolled unin-
                         corporated areas. In January 1989, there were seven. As a result,
                         department response times have increased, and follow-up officer visits
                         have decreased.
                      l  Yolo County reduced its street protection program to 1 deputy per 1,000
                         people in unincorporated areas. Round-the-clock patrols have been
                         abandoned.
                      l  The Tehama County Sheriff’s Department now relies on citizen reports
                         for crimes, such as burglaries and thefts. In the past, deputies visited
                         the scenes of these crimes.
                      . Library funding in Tehama County declined 39 percent between 1983
                          and 1988. Between 1984 and 1986, branch libraries dropped from seven
                         to three. The county cut library staff from 17 to 6. Service hours
                          declined from 115 hours per week to 62. The library suspended chil-
                          dren’s programs and interlibrary loans.
                          Tehama County cut routine road maintenance by 44 percent since 1988.
                          l


                          The county deferred new road construction and equipment replacement.
                          Yet, delay leads to deterioration, thus increasing overall costs. For
                          example, local officials estimated that if minor road “chip” repairs cost
                          about 50 cents per square foot within the first 5 years, then delaying
                          maintenance could result in costs for “asphalt and concrete overlay” of
                          $1 per square foot. Further delay could require reconstructing entire
                          road surfaces at a cost of $5 per square foot.
                          Between 1982 and 1988, Yolo County cut equipment and vehicle
                              l


                          purchases 56 percent. The department used to replace patrol cars after
                          80,000 miles. Now cars are driven for as many as 160,000 miles. In
                          1988, the department purchased 3 new cars, although it needed 15.
                       . Tehama County patrol cars are now driven as many as 120,000 miles. In
                          1988, the Sheriff’s Department could only afford to replace six vehicles
                          with used rental cars.
                       . Lacking office and storage space, the Tehama County Department of
                          Social Welfare now stores confidential files in boxes on the floor. Some
                          employees work in hallways.


                                   Page 31                                 GAO/HRDsO-95   Distressed   Communities   in California
                                   Chapter 3
                                   Actions Taken by Poorer Counties Had Some
                                   Positive, but More Negative Lmpact on
                                   Public Services




                           l       The Yolo County Social Services Department has also deferred building
                                   repairs and modifications. Dilapidated office space remains vacant,
                                   while staff are crowded into existing space. Files are stacked in public
                                   corridors.


Yolo and Tehama Rationed           Welfare and criminal justice programs are mandated by the state. How-
                                   ever, because Yolo and Tehama cannot meet the demand for these ser-
Mandated Program                   vices, they have begun to ration them. Some rationing has
Services                           communitywide consequences. For example:

                           l     Tehama’s Probation Department caseload increased 68 percent-from
                                 102 probationers per officer in 1984 to 171 in 1989. As a result, 72 per-
                                 cent of all probationers-a   percentage that includes drug dealers, child
                                 abusers, and burglars-meet      with probation officers only once per 3-
                                 month period.
                           l     Yolo County’s Teen Parent Program has a waiting list of 20. Although
                                 this service became a state-funded program 3 years ago, demand
                                 exceeds state funding. County funds are not available to meet the need
                                 for an additional public health nurse for the program.
                               l Yolo County is under a federal court order to eliminate overcrowding in
                                 its jails. The county responded by creating an early release program.
                                 From August to October 1987,76 prisoners were released under this
                                 program, including burglars and drug offenders.
                               . Tehama County Jail is also overcrowded. At the time of our visit, each
                                 of the jail’s 82 beds and 24 portable cots all were occupied, and another
                                  10 inmates slept on the floor. The county paid a neighboring county jail
                                 to house 3 1 more inmates.


                                   Voter initiatives, state policies, and weak local economies caused most of
Conclusions                        the fiscal and public service problems we observed in Yolo and Tchama
                                   counties, although the loss of GRS contributed. The state did not take
                                   steps to offset the loss of federal aid in poorer communities, nor did it
                                   take other steps to lessen fiscal stress associated with Proposition 13.
                                   Therefore, California counties, such as Yolo and Tehama, must cope
                                   with their public service problems largely on their own. Both communi-
                                   ties improved program administration and operations in an attempt to
                                   maintain local public services with less revenues, before and after GKS
                                   expired. However, the counties did not raise tax rates, and increasing




                                   Page 32                               GAO/HRD90-96   Distressed   Communities   in (‘alifomia
Chapter 3
Actions Taken by Poorer Counties Had Some
Positive, but More Negative Impact on
Public Services




user fees provided little help. Because management and revenue strate-
gies were insufficient, Yolo and Tehama counties were forced to cut pro-
grams and postpone capital investments to cope with their fiscal
distress.




Page 33                               GAO/IiRD-9@96   Distressed   Communities   in California
Appendix I

Major Contributors to This Report


                  John M. Kamensky, Assistant Director, (202) 275-6169
Human Resources   Margaret Wrightson, Assignment Manager
Division,         Robert Dinkelmeyer, Economist
                  Brian Lepore, Evaluator
Washington D.C.
                                                                                                             -
                  Craig Russell, Evaluator-in-Charge
San Francisco     Karen Lyons, Senior Evaluator
Regional Office   Michael Courts, Evaluator
                  Inez Azcona, Evaluator




(118846)          Page 34                         GAO/HRD-90-96   Distressed   Communities   in (‘alifomia