Distressed Communities: Public Services Declined in New Jersey Despite Targeted State Aid

Published by the Government Accountability Office on 1990-07-09.

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

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

Ally 1990
                Public Services
                Declined in New
                Jersey Despite
                Targeted State Aid


July 9, 1990

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

Dear Mr. Chairman:

This report provides information about the condition of basic public services in poorer
communities in New Jersey. 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. The
report also examines local efforts to cope with existing fiscal problems and assesses whether
state policies helped to offset these circumstances. This is the first of three case studies on
this subject. The other two case studies are on fiscally distressed communities in California
and Texas.

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

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

Sincerely yours,

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

                              In 1987, New Jersey reduced the negative impact of the loss of GRS
                              funds by expanding a program of fiscal assistance targeted to its poorest
                              municipalities. State funding more than offset GR!? losses of $1.2 million
                              in Passaic and $225,000 in Bridgeton. However, public services declined
                              despite 1ocaI efforts and state aid, suggesting that problems were
                              increasing at a faster rate than state aid. Overall, outcomes in Passaic
                              and Bridgeton show that poorer communities have serious problems
                              that cannot easily be solved. Yet state aid helped in both communities
                              because services would have declined even further without these funds.

Principal Findings

Federal Aid for Local         When domestic problems have been unresolved at lower levels of gov-
Public Services Fell in the   ernment, the federal government has often intervened through financial
                              aid and regulation. Grants-in-aid spending in the 1960s and 1970s
1980s                         reflected increased federal involvement in local public affairs. However,
                              in the 1980s federalism policies changed and budget priorities shifted,
                              causing federal aid to municipalities and counties to decline substan-
                              tially. These factors also led the Congress to end the GEE!program in
                              1986 (see pp. 10-14).

Poorer Communities Are at     All local governments have had to adjust to shrinking federal support,
Greater Risk                  However, because poorer local governments have higher service needs
                              but fewer resources of their own, they have had greater difficulty
                              absorbing these cuts. In New Jersey, a growing fiscal gap between
                              wealthier and poorer communities, relatively weak property tax bases,
                              and relatively greater public service responsibilities compounded the
                              problems of poorer communities such as Passaic and Bridgeton (see pp.

Reductions in Public          Poorer governments-like     all governments-have     a number of coping
Services Was the Strategy     strategies to choose from when public service needs exceed revenues.
                              These strategies include management improvements and tax and user
Relied on Most                fee increases. They also include reductions in program spending and
                              postponement of capital investments. Existing fiscal pressures led Pas-
                              saic and Bridgeton to use all four strategies before as well as after 1986.
                              During both periods, management improvements in administration and

                               Page3                         GAO/~W96     Dbttwsed   Communities   in New Jersey
Page 5

Chapter 4                                                                                           34
State Aid Offset the   New Jersey Shows Concern About the Problems of Poor                          34
Loss of General        New Jersey Has Taken Action to Help Its Poorest                              35
Revenue Sharing in          Municipalities
                       State Aid More Than Replaced General Revenue Sharing                         37
New Jersey’s Poorest        in Passaic and Bridgeton
Communities            Conclusions                                                                  37

Appendix               Appendix I: Major Contributors to This Report                                 40

Tables                 Table 1.1: Per Capita Federal and State Aid to Local                          13
                           Governments (Constant 1982 Dollars)
                       Table 2.1: Percentages of State and Local Direct General                      23
                           Expenditures for Selected Services in New Jersey, by
                           Type of Government (1987)
                       Table 2.2: Comparison of Revenue Sources for FY 1986-                         24
                           87-New Jersey Local Governments Versus the U.S.
                       Table 2.3: Socioeconomic Characteristics in All New                           26
                           Jersey Municipalities and in Passaic and Bridgeton
                       Table 2.4: Percentage Changes in Revenues and                                 28
                            Expenditures for Selected Items in All New Jersey
                           Municipalities and Passaic and Bridgeton (1978-87)
                       Table 4.1: Aid Distributed Under the Distressed Cities                        35
                       Table 4.2: Funds Passaic and Bridgeton Received From                          37
                            Distressed Cities Program and From GRS

Figures                Figure 1.1: Percentage of Total Direct Expenditures for                       11
                            Selected Public Services, by Type of General
                            Government (FY 1987)
                       Figure 1.2: Trends in Federal Aid to Local Governments                        12
                       Figure 1.3: Number of Counties Above or Below the                             16
                            National Per Capita Mean Income in 1978 and 1987
                       Figure 1.4: Case Study Municipalities in New Jersey                           20
                       Figure 2.1: Number of New Jersey Municipalities Above                         22
                            or Below the Median Per Capita Income (1969 and

                       Page 7                       GAO/HRD@O-Ml   D&rewed   Communideu   In New Jersey
Page 9   GAOpIRIHW%   Distressed   Communities   in New Jersey
                                           chapter I

Figure4 1.l : Percentage of Total Direct
Expenditures for Selected Public           Porcontagas of Total Exmdlues    tar Each Sa~~lcr
Services, by Type of General               100
Government (FY 1987)










                                            Source: GAO calculations   based on Bureau of Census, Government Finances in 1986437

                                            American public opinion strongly 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, especially when problems
to Local Governments                        are unresolved at lower levels of government. Problems unresolved at
                                            lower levels of government have often spurred new federal initiatives.
Has Fallen                                  Grants-in-aid spending reflected these increased federal commitments to
                                            localities as aid rose steadily until 1978, as figure 1.2 shows.

                                             Page 11                                   GAO/HBD90-99    Diatrewed   Communities     in New Jersey
                                          Chapter 1

Table 1.1: Per Capita Federal and State
Aid to local Governments (Constant 1982                                                                  Fiscal years              Percentage
Dollarsa)                                                                                             1980            1987             change
                                                                -- --.
                                          Direct federal aid to local governments
                                          Total                                                    $120.07              $67.64              -44%
                                          Public welfare
                                                                                           ______      1.36                 163                20
                                          Education              ._“.                                  9.49                5.45              -43
                                          General revenue sharing                                    -25.94                8.60b             -67
                                          Hislhways                                                    0.68                0.97                44
                                          Housing and community development                           20.97               24.44                17
                                          Health and hosbtals                                          1.16                 1.05                -9
                                          Other                                                       60.47               25 69                 -58
                                          State aid to local governmenW
                                          Total                                                     5481.80             $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               787t                     2
                                          aDollar amounts are rounded   Percentage change is computed using unrounded data
                                          bThe last quarterly revenue sharing payment was pard In October of 1986. This figure Includes a few
                                          quarterly payments that some local governments received before the program’s fundlng expired.

                                          ‘May Include federal ard passed through to localities
                                          Sources: Aid and U.S. population from Bureau of the Census, Government Finances m 1979-80,Govern-
                                          ment Finances in 1986-87, and Statisitcal Abstract of the United States The tmpllclt price deflator for
                                          state and local government purchases of goods and services is from Bureau of Economic Analysis,
                                          Survey of Current Busrness.

                                          General revenue sharing was originally introduced as the fiscal center-
The Rise and Demise                       piece of the Nixon administration’s “New Federalism.” This sweeping
of General Revenue                        presidential initiative would have nationalized welfare through the
Sharing                                   Family Assistance Plan. It would have consolidated 129 categorical
                                          grants (totalling $11.3 billion) into six decentralized block grants. And it
                                          would have created a $5 billion program of unrestricted intergovern-
                                          mental aid-general revenue sharing-distributed         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

                                           Page 13                                   GAO/I-lIULW96      Di~tmssed   Communities    in New Jersey
                      Chapter 1

                      services and because poorer communities received relatively more funds
                      per capita than their wealthier neighbors, GRS was a particularly valu-
                      able 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 GRS funds are unrestricted.” That is, GRS funds could be spent for
                      any purpose that the local government could legally spend its own reve-
                      nues for, making GRS dollars virtually indistinguishable from local reve-
                      nues. 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 GRSdollars to public service problems
                      with precision. This does not mean that general conclusions about the
                      impact of the program’s expiration cannot be drawn. GFS losses were one
                      factor contributing to general fiscal pressures that caused the public ser-
                      vice problems we observed.

                      Fiscal disparities characterize the situation in which different communi-
GRS Losses Are        ties must tax their citizens and businesses at different levels to obtain
Especially Hard for   similar public services. This occurs because neither fiscal circumstances
Poorer Communities    nor the need for public services are uniform across communities. Such
                      disparities make it harder for poorer communities to provide adequate
to Absorb             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 surrounding local-
                      ities, raising them is likely to exacerbate existing problems of middle-
                      class flight and declining business investment.

                       Nationwide, these kinds of imbalances between needs and revenues
                       grew over the past decade. The number of counties where per capita
                       income was below 70 percent of the national average rose from 7 11 to
                       871 between 1978 and 1987, a 2%percent increase. (See fig. 1.3.) In con-
                       trast, 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, populations have become larger in both wealthier
                       and poorer counties in the United States. A smaller fraction of the U.S.
                       population lived in middle-income counties in 1987 than in 1977.

                       3See,for example, Catherine Lovell, “Measuring the Effects of General Revenue Sharing: Some Alter-
                       native Strategies Applied to 97 Cities,” in Revenue Sharing, David Caputo ed., (Lexington, .Mass.:D.C.
                       Heath and Co., 1976), pp. 49-66.

                       Page 15                                   GAO/HRlHO-96      Distressed   Communities   in New Jersey
Chapter   1

also have the power to affect equity, effectiveness, efficiency, 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
constrain service delivery. 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 compensate localities for the costs of oversight and administration
of state regulations. Targeting reimbursements can reduce certain man-
dated costs that fall heavily on poorer c0mmunities.J

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
198Os, when federal aid decreased, state aid to local governments
increased, from an average $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 either not as
substantial as state aid (e.g., education) or where it did not decline as
much (e.g., 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 municipal 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 targeted to poorer communi-
ties.” Because aid is predominantly distributed on a per capita or
return-to-place-of-origin basis,” poorer communities continued to receive
less aid than their wealthier or larger neighbors during this period,

‘Legislative Mandates: State Experiences Offer insights for Federal Action (GAO/HRDS&75,        Sept.
27, 1988).

sFixally Distressed Communities: State Grant Targeting Provides Limited Help (GAO/HRD 90-69,
May 13, 1990).

“Transfers of state funds to local governments on a return-to-placeof+rigin-basis are also called “dis-
tributions 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 collated.

Page 17                                    GAO/lfRMMM6       Distressed   Communities   in New Jersey
chspt4?r 1

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

Page 19                     GAO/HBDW96   Stressed   Comnumities   in New Jersey
Wide Fiscal Disparities in New Jersey Put the
PoorestComunities at the GreatestRisk

                        New Jersey has enjoyed sustained economic growth and prosperity in
                        recent years. In 1978, New Jersey ranked sixth among the 50 states in
                        per capita income. In 1988, it ranked second. Not all of the state’s com-
                        munities have shared in this increased prosperity, however, and an
                        already large fiscal gap between wealthier and poorer communities
                        grew, New Jersey municipalities depend heavily on property taxes for
                        revenue. They also play a key role as public service providers. These
                        two circumstances have contributed to disproportionate fiscal burdens
                        on poorer communities. Passaic and Bridgeton are two such

                        New Jersey made substantial economic progress over the past decade. In
New Jersey Is a State   1978, the state’s personal per capita income was $9,247-14 percent
of Wide Economic        higher than the national average. In 1988, personal per capita income
Contrasts               was $21,882-33 percent higher. Although New Jersey’s 1978 unem-
                        ployment rate was 7.2 percent-18 percent higher than the national
                        average-in 1988, its rate was 3.8 percent-3 1 percent lower.

                        New Jersey’s municipalities did not benefit equally from this economic
                        expansion. As a result, the unemployment rates of 53 of New Jersey’s
                        567 municipalities exceeded the state average by 50 percent or more in
                        1987. Similarly, 42 municipalities had 1985 per capita incomes of at
                        least 30 percent below the state average. Much of the population growth
                        and business expansion over this period occurred in coastal and central
                        New Jersey, while other areas lost ground economically. These differ-
                        ences have caused a fiscal polarization in which an increasing number of
                        communities in New Jersey are either very wealthy or very poor. (See
                        fig. 2.1.)

                        ‘Counties and municipalities are the only units of general-purpose local government in New Jersey.
                        As provided by statute, New Jersey’s 21 counties are governed by elected boards of chosen free
                        holders. New Jersey’s 567 municipalities use the names city, town, township, borough, or village
                        interchangeably, but they are all municipal corporations by statute. This report focuses on municipal-
                        ities rather than counties because New Jersey municipalities have wider variation m economic and
                        fLscal conditions than counties.

                        Page 21                                   GAO/HRD-90-96      Distressed Communities in New Jersey
                                        Chapter 2
                                        Wide Pkal Disparitka   in New Jersey Put the
                                        Poorest Cbnnmnitim   at the Greatest Risk

Municipalities Are Key                  As a matter of state law and custom, municipalities play a key role in
Service Providers                       the delivery of public services in New Jersey.” Counties are the domi-
                                        nant providers of welfare, hospitals, and corrections service’s Munici-
                                        palities are the dominant providers of police, fire, parks and recreation,
                                        libraries, and sanitation services, as table 2.1 shows.

Table 2.1: Percentages of State and
Local Direct General Expenditures for   Figures are percentages .._-___                                                        --           ~- -~.-.    ~-~
Selected Services in New Jersey, by                                                                     School and
Type of Government (1987)                                                                                   special
                                                                    Total        Municipalities
                                                                                      ___-__.              districts         Counties             States
                                        Highways                     100.0
                                                               --._______                ~- 78.7                    5.1                81              68 1
                                        Police                       loo.0                  75.9.--         -       0.0                68              17.3
                                        F!re                        100.0 __-~
                                                                           __I              87.9 --.-_l_          Ils-                 05               0.0
                                        Sewerage and
                                           sanitation               too.0                    42.4___-              54 6                2.5              05
                                        Parks and
                                           recreatton               100.0 __-_.             30.0          --        0.0             24.0               46 0
                                        Houslng and
                                           development              100.0                    10.5                  68 6                83
                                                                                                                                       __--.-          126
                                        Air                -      ~~~ -.
                                        Transportation              100.0                    45.9 -0.0                              54 1                0.0
                                        Libraries                -- 100.0                    71.5                   0.0             22.9__-~-           55
                                        Education                   100.0                    10.8                  61.9              7.2               20 1
                                        Note. Columns may not add to 100 percent because of rounding           In New Jersey, cltles and townshlps
                                        are called “munlcipallties and they do not overlie each other.

                                        Source Bureau of the Census, Government Finances in 1986-87

Municipalities Rely                     New Jersey fiscal policies restrict local government revenue sources. In
Heavily on Property Taxes               particular, according to state officials we interviewed, local sales taxes
                                        may not be imposed. And, only one New Jersey municipality, Newark,
                                        has permission to levy a payroll tax. As a result, in fiscal years 1986-87,
                                        property taxes accounted for 94.5 percent of all municipal tax revenues.

                                        “In 1986-87 local governments delivered 59 percent of all public services in New Jersey. Nearly all
                                        types of local services are delivered mostly by municipalities and counties. The principle exceptions
                                        to this are primary and secondary education, which is the responsibility of school districts, and
                                        housing and community development and sewerage, which are provided by special districts.

                                        Page 23                                     GAO/HBD9lM6          Distressed      Communities        in New Jersey
                         Chapter 2
                         Wide Fiscal Disparities   in New Jersey Put the
                         Poorest communities     at the Greatest Risk

                         State aid to municipalities in sew Jersey is substantial compared with
State Aid Is             the national average (see table 2.2). In 1986-87, New Jersey provided 37
Substantial, but Could   percent of general revenues, compared with a national average of 20
Be More Effectively      percent. The state could reduce the disparities between wealthier and
                         poorer communities through increased targeting of its general state-local
Targeted                 assistance, which totaled $1,099 million in fiscal year 1989.” Only 19
                         percent of this aid was distributed according to need. As a result,
                         despite a high level of aid, local property tax burdens still vary widely
                         among New Jersey municipalities. For example, in 1987, equalized prop-
                         erty tax rates ranged from 12.2 percent in Winfield Township to 0.6
                         percent in Mantoloking Borough, with a state average of 1.9 percent.
                         Forty-eight municipalities (comprising one-fifth of the state’s popula-
                         tion) had rates that exceeded this average by 50 percent or more.

                         In 1979, its peak year, GRS provided $102 million to New Jersey munici-
GRS Was Valued           palities, which was equivalent to 3 percent of municipal own-source rev-
Because It Could Be      enues.; Poorer municipalities, including Passaic and Bridgeton, received
Used for Local Public    more GRS funds per capita than the average municipality in New Jersey.
                         In 1986, municipal per capita payments averaged $9.06. However, GRS
Services                 provided $2 1.54 per capita in unrestricted aid to Passaic and $11.97 to
                         Bridgeton. Between 1979 and 1986, Passaic received an average of
                         $887,000 annually-8     percent of own-source revenues, equivalent to 62
                         percent of all federal aid. In Bridgeton, annual GRS funding averaged
                         $307,000, or 18 percent of own-source revenues and 35 percent of all
                         federaI aid.

                         GRS did not represent a large share of revenues in either community,
                         although it was a substantial share of federal aid. Nevertheless, local
                         officials regarded these funds as very important. Unlike most other
                         sources of intergovernmental aid, GRS funds could be spent on virtually
                         any local public service need OF priority.

                         “New Jersey has nine general fiscal assistance programs. Two programs account for $844 million and
                         compensate IocaIities for the state’s preemption of public utility taxes. These are the Public Utilities
                         Franchise and Gross Receipts Tax Program ($686 million) and the Business Personal Property Tax
                         ReDkwement Revenue Promam ($159 million). More detail on these and the other seven programs is
                         cokained in appendix VI of Fisctily Distress&d Gxtununities: State Grant Targeting Pro&de; Limited
                         Help (GAO/HRD90-69, April 13, 1990) Washington, D.C.

                          ‘Own-source revenues are those local tax and other revenues not derived from intergovernmental
                          grants-in-aid programs.

                          Page 26                                   GAO/tIRlMMk~       Distissed   Communities    in New Jersey
                              Chapter 2
                              Wide Fbcal Disparities in New Jersey Put the
                              Poorest Cmmnunitiee at the Greatest Risk

                              In economic terms, Passaic and Bridgeton are communities with few
                              resources of their own. According to the most recent data available:

                          l The rate of population growth in New Jersey was 7.0 percent between
                            1970 and 1987. During this period both Passaic and Bridgeton lost popu-
                            lation Passaic’s population declined 2.3 percent, while the decline in
                            Bridgeton was 8.4 percent.
                          l Statewide, equalized property values per capita averaged $46,884. In
                            Passaic this figure was only about one-third of the state average-
                            $16,763. In Bridgeton equalized property value per capita was
                            $11,989-less than 25 percent of the statewide average.
                          l Overall, 9.5 percent of all New Jersey’s citizens have incomes below the
                            national poverty line. Yet, 23.5 percent of Passaic residents and 23.1
                            percent of Bridgeton residents fall in this category.
                          . Statewide, 14 percent of New Jersey’s children live in homes with
                            incomes below the poverty line. However, in Passaic, 38 percent of all
                            children live in these conditions. In Bridgeton, 37 percent of all children
                            live in homes with incomes below the poverty line.

Revenue and Expenditure       Municipal revenue and expenditure data help to illustrate the public ser-
Trends Are Declining or       vice consequences of concentrated demographic, social, and economic
                              problems.” Trend data from Bridgeton and Passaic illustrate declining
Lagging Behind State          service delivery in dramatic fashion, as table 2.4 shows.
Average Growth

                              “Service outputs (e.g., the degree of police services provided) cannot be measured directly. Constant-
                              dollar expenditures per capita are a rough proxy for output because a wide variety of state and local
                              policy and administrative actions chsnge expenditures from year to year.

                              Page 27                                   GAO/HRD-W96        Distressed   Conuntiti~    in New Jersey
Actions Taken by Poorer CommunitiesHad
SomePositive but More Negative Impact on
Public Services
                            Passaic and Bridgeton used all four strategies described in chapter l-
                            improved administration, increased tax revenues, reductions in program
                            spending, and postponement of capital investments-to       cope with their
                            fiscal distress and declining federal aid. However, the techniques they
                            relied on most were spending cuts and postponement of capital invest-
                            ments. Passaic and Bridgeton were already fiscally distressed in 1987.
                            Thus, they had been using all these strategies before general revenue
                            sharing expired. They continued these strategies to help offset the loss
                            of $1.2 million in fiscal year 1986 GRS funds in Passaic and $225,000 of
                            these same funds in Bridgeton.

                            Both Passaic and Bridgeton improved their administration and program
Management                  operations to maintain services with less revenue. Notable strategies
Strategies Helped to        were improvements in revenue collection techniques, the institution of
Maintain Services           efficiencies in service delivery, and increased reliance on volunteers to
                            deliver public services.
With Less Revenue

Improved Revenue            One sign of fiscally distressed municipalities  is lower-than-average rates
Collection Techniques       of property tax collections. Low rates are problematic because property
                            taxes are the major source of all tax collections for New Jersey munici-
Increased Available Funds   palities and because efficient collection yields more revenue at lower tax
                            rates.1 The state average yield was more than 96 percent of property
                            taxes levied in fiscal year 1987. However, only 4 of the 10 most dis-
                            tressed municipalities in New Jersey collected more than 90 percent of
                            taxes due that year.

                            Because of its more rigorous enforcement, Passaic had the highest col-
                            lection rate (98 percent) of New Jersey’s 10 most distressed cities in
                            fiscal year 1987, In Passaic, if property taxes are not paid promptly, the
                            city institutes foreclosure proceedings quickly. It uses profits from sales
                            of these properties to pay back taxes. Bridgeton has not been as suc-
                            cessful as Passaic. However, it is attempting to increase its property tax
                            collection rate (86.7 percent in 1987). The city is automating tax collec-
                            tion records and speeding up foreclosures.

                            IThe failure to collect taxes owed is a problem of efficiency in the tax collection process that pm
                            duces a gap between total tax liabilities and tax revenues. When a large share of taxes owed by
                            taxpayers is uncollected. tax rates may have to rise to compensate for revenue losses This, in turn,
                            puts a greater burden on taxpayers who pay their taxes.

                            Page 29                                    GAOpiRlMON         Distressed   Communities   in New Jersey
                       chapter 3
                       Actions Taken by Poorer Chnmunities   Had
                       Some Positive but More Negative Impact on
                       Public Services

                       average municipality’s budget in New Jersey+ In Bridgeton, it accounted
                       for 5.7 percent. In Passaic, this figure was 15.7 percent. Although Pas-
                       saic supplements its fire department with a volunteer auxiliary force,
                       professional firemen provide its primary fire protection. In contrast,
                       Bridgeton (which has a lower population density than Passaic) now uses
                       volunteers extensively, limiting its professional firefighters to two per

                       Both communities relied on volunteering in other areas as well. In
                       Bridgeton, for example, police personnel worked without compensation
                       on weekends to renovate office space for the department. Also,
                       Bridgeton employees at times clean their own offices during off-duty

                       Both Passaic and Bridgeton raised taxes when GRS expired. As described
Significantly          in chapter 1, increasing taxes in poorer communities such as Passaic and
Increasing Local       Bridgeton puts a disproportionate share of public service burdens on
Revenues Is Not a      local taxpayers. It also negatively affects the ability of the these com-
                       munities to compete for new businesses and residents. High property tax
Viable Solution        rates encourage residents and businesses to move to neighboring com-
                       munities or even other states with lower rates. This, in turn, further
                       increases the burden on the remaining residents and businesses.

                       Ebth Passaic and Bridgeton used management improvements and tax
Cutting Programs and   increases to cope with general fiscal distress and the loss of GRS. Yet
Delaying Capital       public service reductions and postponements played the major role in
                       their overall strategies. Programs were cut, planned programs were
InveStments Were the   abandoned, and public works projects were postponed.
Primary Strategies

                       Page 31                               GACWRD-WB6   Didreseed   Chnnmnities   in New Jersey
                    Actions Taken by Poorer Communities   Had
                    Some Positive but More Negative Impact on
                    Public Services

Programs Were       Fiscal pressures not only force municipalities to cut programs, they also
                    prevent them from instituting new programs that are needed. For
Abandoned           example:

                l City officials in Passaic cited the need for a preventive medicine public
                  health clinic to address the city’s high infant mortality, hypertension,
                  and diabetes rates.
                . Both Bridgeton and Passaic officials want to expand police services,
                  instituting more proactive strategies to control and prevent crime. Drug-
                  related crime is increasing in Passaic and Bridgeton. Public officials we
                  spoke with reported that services have declined to such an extent in this
                  area of high national priority that they can only react to reports of

                    Page 33                               GAO/HIJUMW6   Distressed   communities   in New Jersey
                                       Chapter 4
                                       State Aid OfTset the Loss of General Revenue
                                       Sharing in New Jemey’s Poorest Communities

                                       Nevertheless, it identified certain changes to improve the state aid
                                       system. Most important, the commission believed that the current
                                       system of unconditional municipal grants is not well targeted. In 1985,
                                       the wealthiest 20 percent of municipalities received $165 per capita in
                                       such grants, while the poorest 20 percent received $134.

                                       To remedy this problem, the commission recommended that New Jersey
                                       fold five existing municipal aid programs into a single program. Under
                                       the single program, no municipality would receive less funds than it had
                                       before. However, the poorest communities would receive much more.
                                       Giving these communities extra help would significantly reduce their
                                       effective property tax rates. The commission estimated that the pro-
                                       posed Municipal Equalization Aid Program would cost $351 million more
                                       than New Jersey’s existing system in the first year. New Jersey has not
                                       enacted the Municipal Equalization Aid Program, although those we
                                       interviewed expected the state legislature to revisit commission findings
                                       during the 1991 legislative session.

                                       While the distribution of state aid continues to favor wealthier commu-
New Jersey Has Taken                   nities, the state has taken some measures to help its poorest communi-
Action to Help Its                     ties. New Jersey’s Distressed Cities Program factors need and tax effort
                                       into distribution decisions, This program meets short-term financial
Poorest Municipalities                 crises in its poorest municipalities. Low program funding ($17.5 million)
                                       and the small number of municipalities (10) participating in the first
                                       year were consistent with this narrow purpose (see table 4.1).

Table 4.1: Aid Distributed Under the
Distressed Cities Program                                                                                                      Number of
                                       State fiscal year              Funding level (in millions)                   municipalities aided
                                        1987               --.-                               $17.5                                      10
                                        1988                       ..-..I__                    700                                       48
                                        1989                                                  120.5                                      50
                                        1990                                                  120.0                                      40

                                       The program’s structure also reflects the aim of providing carefulIy
                                       targeted, stop-gap financial help in two ways. First, eligibility criteria
                                       assure that only distressed communities qualify,” Second, allocations are
                                       discretionary. According to those we interviewed, the Distressed Cities
                                       Program is unique among New Jersey general fiscal assistance programs

                                        Vhe~e criteria are property tax rates, equalized property values, and percentageof Aid to Families
                                        With Dependent Children population.

                                        Page 35                                  GAO/IUUWMM         Dimtresaed cOmmunities in New Jersey
                                         Chapter 4
                                         State Aid Offmet the bss of General Revenue
                                         Sharing in New Jersey’s Poorest Communities

                                         Passaic and Bridgeton rank 8th and 10th on the states’ index of fiscal
State Aid More Than                      distress.? As such, they have been recipients of benefits under the Dis-
Replaced General                         tressed Cities Program since 1988. As table 4.2 shows, the amounts Pas-
Revenue Sharing in                       saic and Bridgeton received more than offset their GP,S losses. For
                                         example, in fiscal year 1986 (the last full GRS program year) Passaic
Passaic and Bridgeton                    received $1.1 million in revenue sharing funds. Passaic’s 1990 allocation
                                         under the Distressed Cities Program was $4.9 million, In-constant dol-
                                         lars, this figure is 280 percent greater than its 1986 GRS allocation. Simi-
                                         larly, Bridgeton received $225,000 in revenue sharing funds. In
                                         comparison, its 1990 state-aid allocation was $740,000 in constant dol-
                                         lars, 180 percent greater.

Table 4.2: Funds Passaic and Bridgeton
Received From Distressed Cities          Dollars   in thousands
Program and From GRS                                              Distressed cities program                                         GRS
                                         Fiscal Year              Bridgeton
                                                                    .._.              Passaic                       Bridgeton              Passaic
                                         1986                               .                      .                     $225                $1.162
                                         1987                                                                                   .                     .
                                         1988                          $800’              $2.500’                               .                     .
                                         1989                          1,100                                         3          .
                                                                                           3,300                                                      l

                                         1990                            740               4,850                                .                     .

                                         Sources, Department of Community Affairs and munlclpal budgets of Passaic and BrIdgeton

                                         Recent increases in state aid to Passaic and Bridgeton reflect New
Conclusions                              Jersey aid policies. State officials told us the state continues to dis-
                                         tribute funds from current state aid programs according to existing for-
                                         mulas. However, it targets new aid to its poorest communities, thereby
                                         helping to lessen local public service problems. Some local coping strate-
                                         gies were efforts to maintain existing services. These efforts notwith-
                                         standing, essential services, such as police and fire, declined, and needed
                                         capital investments were postponed in both Passaic and Bridgeton. This
                                         suggests that these communities’ public service problems were
                                         increasing at a faster rate than state aid.

                                         The continuation of such declines despite state and local efforts to halt
                                         them shows that Passaic and Bridgeton have serious problems. They are

                                         ‘The state’s Office of Management and Budget developed this index to determine eligibility for Dis-
                                         tressed Cities funds. The index is actually a composite ranking, computed by ranking the sum of
                                         rankings of each of the state’s 567 municipalities on eight factors: (1) unemployment rate, (2) per
                                         capita income, (3) percentage of the housing stock built before 1940, (4) parentage of the housing
                                         stock that is substandard, (5) percentage of the population receiving AFDC, (6) the rate of population
                                         change, (7) equalized property tax rates, and (8) equalized property valuation per capita.

                                          Page 37                                   GAO/I3lUMCL96      Distressed     Communities     in New Jersey
Page 39   GAO/‘HRB~   Dietreeaed   commnnitiee   in New Jersey
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Appendix I

Major Contributors to This Report

Human Resources     Margaret Wrightson, Assignment Manager
Division,           Robert Dinkelmeyer, Economist
                    Brian L&pore, Evaluator
Washington, DC.

                    Frank Puttalez, Evaluator-in-Charge
New York Regional

 (118847)           Page 40                        GAO/HRDWB6   Dietreesed   Communities   in New Jesse
Chapter 4
State Aid Offset the km of General Revenue
Sharing In New Jersey’s Poorest Communities

problems that will not easily be solved even with all levels of govern-
ment working together. Higher-than-average public service needs and
less productive tax bases are long-term conditions that place substantial
pressure on public service delivery. Nevertheless, we found that
targeted state aid helped by lessening the extent to which spending for
local public services declined in the two communities we visited.

Page 38                                GAO/HBD~BS   Distressed   tkuumunides   in New Jerse
Chapter 4
State Aid Offset the Loss of General Revenue
Sharing in New Jersey’s Poorest Communities

because it does not distribute funds according to a statutory formula.
Instead, eligible communities must submit applications for funds to the
State Department of Community Affairs. The department examines
municipal revenue and expenditure policies. Then it sets funding levels
based on its own evaluation of budgetary conditions. State officials we
interviewed preferred this method to a statutorily based distribution
system. Flexibility, they believe, is important when responding to unan-
ticipated municipal budget shortfalls.

State officials told us that funding is not automatic from year to year.
Moreover, amounts of funding can change as a result of variations in
short-term local budget conditions. Nonetheless, the program appears to
be evolving in the direction of a stable source of general purpose aid to
New Jersey’s poorest communities. First, budget crises have become a
way of life in these municipalities. Communities such as Passaic and
Bridgeton face perennial budgetary shortfalls due to persistent gaps
between public service needs and local resources. As a result, many of
their names appear on the list of beneficiaries each year. For example,
34 municipalities received funding in at least 3 of 4 program years.
Moreover, current state policy favors reducing disparities as a way of
promoting fairness in public services. New Jersey expanded the Dis-
tressed Cities Program significantly in the aftermath of the expiration of
GRS. It has maintained this higher level of effort despite recent state
budget problems.

In 1988, the state increased program funding from $17.5 to $70 million.
It more than quadrupled the number of communities assisted. This
expansion was an effort to offset the negative impacts of the loss of GRs
in New Jersey’s poorest communities. Thereafter, in 1989, funding
increased in Passaic although it declined in Bridgeton, as table 4.2

 Page 30                                GAO,‘HRD-%M   DMmased   Communities   in New Jersey
State Aid Offset the Loss of GeneralRevenue
Sharing in New Jersey’s PoorestCommunities

                        New Jersey reduced the negative impacts of the loss of general revenue
                        sharing by expanding a program of fiscal assistance to its poorest
                        municipalities. For most local governments, New Jersey’s Distressed
                        Cities Program did not fully replace federal funds. However, the poorest
                        communities fared better in comparison with GRS because the state pro-
                        gram is more targeted. Despite this, public service conditions in Passaic
                        and Bridgeton continued to decline. This suggests that while state aid
                        helped, public service problems in these two communities were
                        increasing at a rate faster than the growth of state aid.

                        In December, 1984, the New Jersey State and Local Expenditure and
New Jersey Shows        Revenue Policy Commission was established. This state commission
Concern About the       examined state and local finances and spending and recommended
Problems of Poor        changes to improve public service delivery, ln conducting its work, the
                        commission’s objectives, in part, were to
                    . create an adequate balance between local resources and local service
                    l achieve a better division of state and local taxes, and
                    . attain a fairer distribution of tax burden.

                        In 1988 the commission issued its findings. According to this panel, New
                        Jersey relies too heavily on localities to provide public services. It gives
                        too little attention to the adequacy and appropriateness of local tax
                        resources. State and local taxes are unfairly distributed. Ano local gov-
                        ernment responsibilities and resources are mismatched.’ For example,
                        court, public assistance, and mental institution programs are state pro-
                        grams. Yet local governments provide or partly finance these services.
                        They finance most of their share with local property tax revenues. As a
                        result, the commission observed, “traditional local services, such as
                        public safety, roads and bridges and recreation, are crowded out or pro-
                        vided at significantly lower levels.“2 The panel viewed problems as espe-
                        cially serious in New Jersey’s poorest communities. They have the
                        highest needs, but the fewest resources of their own.

                        The commission said that state aid is not a long-term solution to the
                        demographic, social, and economic problems that underlie fiscal distress.

                        ‘New Jersey State and Local Fkpenditure and Revenue Policy Commission, Summary Final Report,
                        July 1988, p. vi.

                        ‘New Jersey State and Local Expenditure and Revenue Policy Commission, Final Report, July 1988,
                        p. vi.

                        Page 34                                 GAO/‘HiUMW96     Distressed   Communities   in New Jersey
                                       Chapter 3
                                       Actions Taken by Poorer communities   Had
                                       Some Positive but More Negative Impact on
                                       Pub& Services

Service Cuts Reduced                   Passaic and Bridgeton reduced services to their residents after GEE
                                       expired. However, service cuts were not new, Both Passaic and
                                       Bridgeton have cut services in the past to meet budget shortfalls. Exam-
                                       ples of actions taken before and after the expiration of GRS include the

                           l Bridgeton eliminated its rescue squad.
                           l Bridgeton eliminated its city bus service when it lost federal matching
                           . Both Bridgeton and Passaic eliminated police foot patrols.
                           l Passaic cut the size of its police force from 144 in 1986 to 129 in 1988.
                             Bridgeton cut its police force from 56 in 1985 to 51 in 1988.
                           l Bridgeton eliminated its Crime Prevention Unit.
                           . Bridgeton closed its municipal swimming pool and a town beach in 1988.
                           . Passaic reduced the number of employees in its recreation department
                             from eight to two since 1981. Equipment was neither repaired nor

Passaic and Bridgeton                  Both communities postponed needed capital projects and improvements.
                                       While these actions save dollars in the near term, they often are not
Postponed Needed Capital               efficient over time. Timely maintenance results in less cost than major
Purchases and Public                   repairs. Examples of these kinds of postponements include:
Works Projects
                               l       Bridgeton’s fire chief would like to build a second fire house to cut
                                       response time. However, this is not financially possible.
                               .       Bridgeton’s fire department has been unable to replace or upgrade its
                                       equipment. The department’s ladder truck reaches nine stories. How-
                                       ever, the city has an 1l-story apartment building that houses senior
                               .       Some of Passaic’s streets, sewers, and waterlines are over 100 years old
                                       and in need of repair. The city works on one street at a time as funds
                                       become available.
                               .       Bridgeton’s police department extends the life of police vehicles up to
                                       180,000 miles. According to Bridgeton’s Chief of Police, neighboring
                                       Vineland retires police cars after 60,000 miles.
                               .       In 1986, Bridgeton canceled 14 capital projects. The City Engineer said
                                       that the last time the city could upgrade its infrastructure was when it
                                       obtained an Economic Development Administration federal grant.
                                   .   Bridgeton lacked the funds to comply with several state mandates, such
                                       as asbestos removal, recycling leaves, and repairing local dams.

                                        Page 32                              GAO/HBDf#gS   Distressed   commnnities   in New Jersey
                            Actions Taken by Poorer Chnmunitiea   Had
                            Some Positive but More Negative Impact on
                            Public Services

                            Property taxes provide the largest share of locally raised revenues in
                            New Jersey municipalities. Even so, improving the management of sec-
                            ondary revenue sources can increase revenues. For example, municipal
                            fines are a small but important source of revenue. Passaic has stepped
                            up enforcement of collection procedures for such times, according to an
                            official we interviewed. This action produced a revenue increase of 30
                            percent, from $294,000 in 1982 to $388,000 in 1987. However, a 3-year
                            collection backlog still existed in 1988, and Passaic has recently sought
                            help from a private contractor. Bridgeton has been less successful in col-
                            lecting fines due to staffing shortages. It had $330,000 in outstanding
                            fines in 1987. The city has added staff and computerized its collections
                            tracking system to address this problem.

                            Cash management practices were also improved. Passaic invests avail-
                            able (Le., reserve) funds in securities that yield higher interest income
                            than bank savings accounts do. In part, this resulted in interest income
                            amounting to $660,000 in Passaic in 1987,4 percent of own-source reve-
                            nues. Bridgeton had investment income exceeding $100,000,3 percent of
                            own-source revenues. State officials recommended that the city review
                            its investment practices to increase this return. One specific recommen-
                            dation was to consolidate city accounts, which would enable a greater
                            return on savings.

Increased Operating         Passaic and Bridgeton found ways to increase their operating efficiency.
                            Passaic’s fire department combined its operations in two fire houses
Efficiency Saved Money      rather than four. The Bridgeton Police Department prolongs the useful
                            life of its patrol cars by often using high-mileage vehicles for less rig-
                            orous use. Bridgeton places unrepaired and unoccupied police cars in
                            high-crime neighborhoods in order to create the impression of a police
                            presence. Rising insurance costs caused Bridgeton and Passaic to drop
                            their workmen’s compensation and liability insurance policies. The com-
                            munities are now self-insured. Passaic estimated that this saved
                            $300,000 in the first year and $200,000 in subsequent years. While self-
                            insurance is becoming a common municipal strategy for coping with
                            escalating liability insurance costs, it carries serious risks. Claims-
                            however high-are now paid directly from municipal reserves.

Volunteerism Saved Money    Fire protection is a major expense in many municipalities in New Jersey.
for Passaic and Bridgeton   Costs depend in large part on the ratio of volunteer to professional
                            firefighters. Volunteer firefighters save communities money. In fiscal
                            year 1987, the cost of fire protection accounted for 8.7 percent of the

                            Page 30                               GAO/HRD-9@06   Distressed   Communities   in New Jersey
                                         Chapter 2
                                         Wide Fiscal Disparities   in New Jersey Put the
                                         Poorest Communities     at the Greatest Ebisk

Table 2.4: Percentage Changes in
Revenues and Expenditures for Selected   Figures     are percentages
Hems in All New Jersey Municipalities                                                                  Statewide           Passaic         Bridgeton
and Passaic and Bridgeton (1978-87)’
                                         Propertv      tax revenues                                               27            21                -13
                                         Total munlclpal       spending                                                3       -18                      3
                                         Police services                                                           11          -24                -17
                                         Fire/rescue      services -...   --._.                                        8         51b              -18
                                         Public works                                                              16                6             -7
                                         Recreation                                                              -10           -67                -44
                                         Libraries                                                                     9       -14                -20

                                         aAll figures are calculated on a constant-dollar,   per-capita basis.

                                         bAlthough Passaic consoltdated firehouses (from four to two) and reduced the number of full-time-
                                         equivalent fire protection employees, it also purchases new equipment and began construcbon of a new
                                         fire house.
                                         Source: GAO calculations based on State of New Jersey, Divlslon of Local Government Services, State-
                                         ments of Financial Condition of Counties and Municlpalltles, Annual Report of the Division of Locam
                                         ernment Services 19fB and 1987.

                                         One reason for the aforementioned spending declines is the rapidly
                                         rising costs of providing health and human services in Passaic and
                                         Bridgeton. Municipal expenditures for these poverty-driven categories
                                         of spending did not rise statewide in constant-dollar terms. However,
                                         expenditures rose steadily in Bridgeton and Passaic, putting pressure on
                                         other categories of spending.

                                          Page 28                                        GAO/J3RLb9@!36 Distressed         Communities   in New Jersey
                                    Chapter 2
                                    Wide Fincal Disparities   in New Jersey Put the
                                    Poorest Communities     at the Greatest Risk

                                    In social and structural terms, Passaic and Bridgeton are communities
Passaic and Bridgeton               with high service needs. Located 12 miles from New York City, Passaic
Have High Service                   is a densely populated municipality. Bridgeton, located near the Dela-
Needs, but Few                      ware border, has a population density about average for a city its size in
                                    New Jersey. As table 2.3 shows, Passaic’s and Bridgeton’s socioeconomic
Resources                           characteristics suggest that they have higher-than-average needs for
                                    public services than other New Jersey municipalities.”

Table 2.3: Socioeconomic
Characteristics in All New Jersey                                                                    All         Passaic           Bridgeton
Municipalities and in Passaic and   Pre-I 940 housing”                                              29.8%            59 4%                 52 5%
                                    Substandard housingb                                             0.9%             3 9%                  lIi%
                                    Non-English speaking population’                                 3.1%            15.7%                  1.8%
                                    Percentage of population
                                    Age 16-l 7 not enrolled in high school                           8.8%            20.8%                 25.2%
                                    Unemployment rate in 1987                                        3.2%            7.11%                  0.0%
                                    AFDC recipients in 1988 as a percentage of
                                       1986 population                                               0.3%             4.2%                   7 2%
                                    Fla;;&f violent crime per 100,000 population in
                                                                                                    583             1.509                  1.717
                                    Qata for “all municipalities” are averages, except houslng, unemployment      rate, and AFDC recipi-
                                    entqwhich are the median values for all 567 municrpalittes.

                                    bHouslng data are a percentage   of year-round houslng units.

                                    ‘Non-English speaking population IS the percentage of population (age 5 and over) who speak Engilsh
                                    poorly or not at all.
                                    Sources: Percentage of population speaking English poorly or not at all and percentage of population
                                    age 16-17 not enrolled in htgh school are from Bureau of the Census, 1980 Census of Population. Vol. 1,
                                    Charactenstlcs of the Population, Chapter C , PCBO-l-C32 Cnrne rates per lM),OC8 populalion are GA6
                                    computations based on data from U.S. Department of Justxe, Federal Bureau of Investigahon, Umform
                                    Crime Reports 1988. pp 65, 94, and 97 All other data are from the New Jersey Oepartment of Treasury
                                    Officent               and Budget, Division of Planning

                                    %ecause public service needs are difficult, and sometimes impossible, to measure directly,
                                    researchers use socioeconomic indicators as proxy measures. Rationales for using proxies are both
                                    methodological and theoretical. Methodologically, proxies are selected because statistically they are
                                    significantly related to more direct but less easily measured indicators of service needs. Alternatively,
                                    proxies are sometimes select& based on what is known about local public w-vices. For example,
                                    other factors equal, a community of detached, single-family houses can be expected to consume fewer
                                    resources than a community of older, multifamily, multistory residences to attain similar levels of fire
                                    protection. Proxies are also se&ted based on arguments that the poor are less able to substitute
                                    private for publicly provided goods, including education, libraries, health, housing, and parks and

                                     Page 26                                    GAO/HRD-90-96       Distreaaed   Communities    in New Jersey
                                    chapter 2
                                    Wide Fiscal Disparities   in New Jersey Put the
                                    Poorest Communities     at the Greatest Risk

                                    Table 2.2 shows that New Jersey municipalities rely more on property
                                    taxes than municipalities nationwide.’

Table 2.2: Comparison of Revenue
Sources for FY 1966~W-New Jersey                                          Municipalities                          All local government
Local Governments Versus the U.S.                                     New Jersey               U.S.              New Jersey           U.S.
Average                             Share of general revenue
                                      From federal government                   -~23            6.5                       4.0              48
                                      From state government-                    37.0           20.3                      33.2        ~... 33 3
                                      All taxes                                 45.2            42 5
                                                                                            ~----                        48 4            38 6
                                         Property                               42.7            20 9
                                                                                            ~..._--                      47~~~~~~~~
                                                                                                                     __I__~ 3            28.4
                                         General sales                           0.0              73                      0.0             42
                                                              ~~~-               “-~~.              ..--.._
                                            and taxes
                                         Other   corporate                       00
                                                                                 25              6.2
                                                                                                 81                       00
                                                                                                                          ,,2 ----..3.6 24
                                                           -~      ~---_.
                                      Fees and user charges                      86
                                                                                 ---            148                        8.5            13.2
                                      Miscellaneous revenue                      69             159                        5.8            loci
                                    Note: Columns may not add to 100 percent because of roundrng. Table uses Bureau of the Census
                                    deflnltion of mumclpalltles In New Jersey and the United States.

                                     Source. Bureau of the Census, Government   Finances in 1986-87, Senes GF-87~5, Table 29, pp 46 and

                                     This heavy reliance on property taxes can place municipalities with low
                                     property values at a serious fiscal disadvantage. Kew Jersey’s average
                                     equalized property valuation per capita was $46,884 in 1987.’ Yet 82 of
                                     the state’s 567 municipalities had equalized property valuations per
                                     capita that were 50 percent or more below the state average. In contrast,
                                     143 municipalities exceeded the state average by 50 percent or more.

                                     ‘This situation is not likely to change in the near future. A July 1988 report by the New dersey State
                                     and Local Revenue and Expenditure Policy Commission rejected local nonproperty taxes as a way of
                                     rationalizing local service delivery and reducing public service burdens among the poorest communi-
                                     ties. The following reasons were cited: “Revenue diversification would not offer significant potential
                                     to reduce local resource disparities Diversification has detrimental effects on economic growth and
                                     land use. Finally, it can have administrative difficulties and taxpayer compliance wxws which make
                                     local-option taxes problematic to employ efficiently and effectively.“See New Jersey State and I&al
                                     Expenditure and Revenue Policy Commission Report, pp. 56-57.

                                     “In New Jersey, municipalities assessproperty for purposes of property taxation. The state’s Divhsion
                                     of Taxation computes a measure of property value called “equalized value” that standardizes these
                                     locally assessedvalues in order to allow valid statewide comparison of the value of property in local
                                     governments. The Divlslon bases its computational procedure on comparison of assessedvaluations
                                     and sales prices in each local unit.

                                     Page 24                                    GAO/HRD9@96         Distressed   Communities     in New Jersey
                                   Chapter 2
                                   Wide F’iscni Disparities   in New Jersey Put the
                                   Poorest Conununitiea     at the Greatest Risk

Figure 2.1: Number of New Jersey
Mkicipalities Above or Below the
                                   150   Number of Yunicfpalities
Median Per Capita Income
(1969 and 1985)                    140










                                          LsmThanm%             8a%toeB%                                     Grmlrnmn
                                          Parcontag#   of Wkn       Par C@ta lncoma of tha 453 Yunklpdtles

                                   Note, Includes 453 municrpalities whose 1966 population was 2,500 or greater. These 453 munlclpallties
                                   Included 98 percent of the state’s population in 1984
                                   Sources- Census 1964 population and 7969 per capita Income data, Office of Revenue Sharing, master
                                   file. and Census 1985 per capita Income, County And City Data Book, 1988: Places File Set [machlne
                                   readable data file] prepared and distnbuted by the Bureau of the Census, 1988.

                                   Without offsetting intergovernmental aid, extreme fiscal polarization,
Municipalities Have                higher-than-average service responsibilities, and heavy reliance on
Significant                        property taxes are likely to create serious local service problems in
Responsibilities but               poorer communities. 2
Limited Local Revenue

                                    ‘As described in chapter 1, assumption of services and intergovernmental aid by higher levels of
                                    government   are the two primary strategies for reducing fiial disparities and/or inequities in local
                                    public service delivery. According to a recent report of the New Jersey State and Local Expenditure
                                    and Revenue Policy Commission, service centralization is not a viable option in New Jersey because
                                    public values and traditions favor keeping service delivery close to the grassroots. However, New
                                    Jersey aid policies have reduced fiscal disparities among New Jersey municipalities. State aid actions
                                    that have been taken are described in chapter 4 of this report.

                                    Page 22                                       GAO,‘Hl?D9IM3     Distressed   Communities   in New Jersey
                                             Chapter 1

Figure 1.4: Case Study Municipalities   in
New Jersey


                                               Page 20      GAO/HRDW96   Distressed   Communities   in New Jersey
                                 Our objectives in reporting on public services in poorer communities
objectives?   ScoPe,   and       were   to   determine

                             . the condition of local public services in light of reductions in direct fed-
                               eral assistance to local governments and the expiration of general rev-
                               enue sharing,
                             * the range of local government responses to these conditions, and
                             l whether state policies and actions have helped to offset public service

                                 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 California,
                                 New Jersey, and Texas. We collected data on public services from local
                                 sources and state documents and we 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 GRS or
                                 otherwise taken steps to lessen the negative impacts of declining
                                 federal-local aid and the expiration of GRS.

                                 As stated, we visited communities in California, New Jersey, and Texas.
                                 We selected states and chose field sites that were different along dimen-
                                 sions of state-local relations that we believed would help to explain vari-
                                 ation in local public service conditions. Differences we considered
                                 included variations in kinds of services provided at state versus local
                                 levels, state mandating policies, and patterns of state aid to local gov-
                                 ernments. Within states, we selected communities that were among the
                                 more fiscally distressed and that had higher-than-average service needs,
                                 as indicated by socioeconomic and other statistical indicators.

                                 This case study is on Passaic and Bridgeton, two of New Jersey’s most
                                 fiscally distressed communities. (See fig. 1.4.) We also visited wealthier
                                 communities in New Jersey. These visits provided a better basis for
                                 assessing conditions in poorer communities. However, because wealthier
                                 communities were not the focus of our work we did not include informa-
                                 tion on them in our report.

                                 Page 18                        GAO/HBD90-96   Dista-esd   Communities   in New Jersey

Figure 1.3: Number of Counties Above or
Below the National Per Capita Mean
Income in 1978 and 1987                   Number       of Ceuntio~

                                                                                           1~130%             Abow 120%
                                                       Porcmntage d Per cap&a Mom hlcomo

                                          Source: U.S. Department of Commerce, Bureau of Econorrxc 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/or
Revenues Imbalances                        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-produce      a decline in public

                                           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 shaping local government. To varying
                                           degrees, states dictate local government structures and services, control
                                           local revenue raising, and direct administration of local programs. States

                                           Page 16                                     GAO/l+RMWM    Distressed   (ILhmmunitie~   in New Jersey
                          Chapter          1

                          administration’s principal aim. Rather, as the President described his
                          intentions in the 1971 State of The Union Address:

                          “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 39,000 state and local governments.
                           Populous states, such as California, received as much as $8.6 billion in
                           total aid, while rural states, such as Wyoming, received as little as $164
                           million. As intended, GRSproved to be the least cumbersome and among
                           the most popular of all federal aid programs, from the perspective of

                           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. Moreover, by 1985, mounting federal deficits convinced the
                           Congress that GRS-a nearly $6 billion line item in the federal budget-
                           was no longer viable. Neither the House nor Senate fiscal year 1986
                           budget resolutions contained GRS funding, and the funding ended on
                           schedule in 1986.

                           Virtually all evaluations of the general revenue sharing program concur
General Revenue            that GRS funds were used predominantly to support local public services
Sharing Was an             and capital investments. For example, according to official use reports
Important Source of        submitted to the Department of the Treasury, GRSprimarily helped to
                           maintain or improve local public services. A Brookings Institution moni-
F’unds for Local Public    toring study identified county spending on public transportation (i.e.,
Services, Yet              roads, highways, and mass transit subsidies) as the program category
Measuring Its Impacts      most significantly affected by GRS. Public safety (i.e., police, fire, and
                           corrections) ranked next among identifiable spending categories, fol-
Is Difficult               lowed by capital spending in primary and secondary education. Among
                           municipalities, public safety spending was most affected. Public trans-
                           portation and environmental protection (i.e., sewerage, sanitation, and
                           water supply) ranked next. Because funds supported essential public

                            Page 14                          GAO/HRD43%96   Distressed   Communities   in New Jersey
                                                    Chapter 1

Figure 1.2: Trends in Federal Aid to Local Governments (1972-87)
3oooo   lalstalll1992   Dolklm In Yllilanm


        1973        1974      lwa       1m   1977        1979      1978     lsm       19111    lsnz       19%3     1964      1985      1oBd       1987
        Fbul    Ymam

                                                    Source: The Advrsory CornmIssIon on Intergovernmental Relations, Significant Features of Ftscal Feder-
                                                    alism, 1981-82 Edition, 1988 Editlon, Vol. Ill: and Bureau of the Census,-

                                                    In the 198Os, changing federalism policies favored an enhanced role for
                                                    states in the development and implementation of intergovernmental
                                                    programs. These programs included some that had previously been fed-
                                                    eral-local.’ 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.l suggests, GIG was
                                                    the most visible, but by no means the only, program cut.*

                                                    ‘General Accounting Office, Block Grants: Overview of Experience to Date and Emerging Issues
                                                    (GAO/HRD-%-46, Apr. 3, l&35), Washington. DC.
                                                    ‘The general revenue sharing program (GAS> was enacted as the State and Local Fiscal Assiitance
                                                    Act of 1972 and amended in 1976,19&J and 1983. It terminated for states in 1980 and lo& govem-
                                                    ments in 1986.

                                                    Page 12                                    GAO/IlltDflO-96   Dls&ssed    Conunnnlties     in New Jersey
Chapter 1


                      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 1970s 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 program (GRS). 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 plays a minor direct role in the provi-
Are Major Providers   sion of domestic public services. Instead, the vast majority of these pro-
                      grams are implemented through a partnership among federal, state, and
of Basic Public       local governments. In this partnership, localities are the workhorses. In
Services               1987, local governments led all general governments in direct spending
                      for police and fire protection, sewerage and sanitation, parks and recre-
                      ation, housing and community development, air transportation,
                      libraries, and general public buildings (see fig. 1.1).

                      Page 10                         GA@‘Hl?D90-96   Dhremed   Communities   in New Jersey


 FY         fiscal year
 GRS        general revenue sharing

 Page 8                         GAO/HRDW98   DistRBeedCommnnitieain NewJersey

Executive Summary                                                                              2

Chapter 1
Introduction              Local Governments Are Major Providers of Basic Public
                          After Rising for Two Decades, Federal Aid to Local                  11
                               Governments Has Fallen
                          The Rise and Demise of General Revenue Sharing                      13
                          General Revenue Sharing Was an Important Source of                  14
                               Funds for Local Public Services, Yet Measuring Its
                               Impacts Is Difficult
                          GRS Losses Are Especially Hard for Poorer Communities               15
                               to Absorb
                          State-Local Strategies to Cope With Needs-Revenues                  16
                          Objectives, Scope, and Methodology                                  18

Chapter 2                                                                                     21
Wide Fiscal Disparities   New Jersey Is a State of Wide Economic Contrasts                    21
                          Municipalities Have Significant Responsibilities but                22
in New Jersey Put the          Limited Local Revenue Sources
Poorest Communities       State Aid Is Substantial, but Could Be More Effectively             25
at the Greatest Risk      GRS Was Valued Because It Could Be Used for Local                   25
                               Public Services
                          Passaic and Bridgeton Have High Service Needs, but Few              26

Chapter 3                                                                                     29
Actions Taken by          Management Strategies Helped to Maintain Services With              29
                               Less Revenue
Poorer Communities        Significantly Increasing Local Revenues Is Not a Viable             31
Had Some Positive but          Solution
More Negative Impact      Cutting Programs and Delaying Capital Investments Were              31
                               the Primary Strategies Used
on Public Services

                          Page6                         GAO/l3ID~B6 DWmssedCommunitiesIn NewJersey

                             program operations helped to maintain public services with less reve-
                             nues. Raising taxes also helped, but these efforts were modest because
                             local businesses and citizens already bore higher-than-average tax rates.
                             Because management and revenue-raising strategies were insufficient,
                             Passaic and Bridgeton relied most on program spending cuts and the
                             postponement of capital investments to cope with their fiscal problems
                             and the loss of federal funds (see pp. 29-33).

State Aid Helped to Offset   New Jersey reduced the negative impact of GRSlosses in its poorest
                             municipalities by expanding a program of fiscal assistance targeted to
Declining Federal Aid        its poorest communities. Funding under the New Jersey Distressed
                             Cities Program more than offset GRSlosses in both Passaic and
                             Bridgeton. For example, Passaic’s 1990 allocation under the state aid
                             program was $4.9 million. In constant dollars, this is 170 percent greater
                             than Passaic’s 1986 GRSallocation. Similarly, Bridgeton’s 1990 allocation
                             under the state aid program was $740,000. In constant dollars, this is
                             236 percent greater than Bridgeton’s 1986 GRSallocation. Local efforts
                             and state aid notwithstanding, GAOfound that public services declined in
                             both Passaic and Bridgeton. These outcomes suggest that poorer commu-
                             nities, such as Passaic and Bridgeton, have serious problems that cannot
                             easily be solved. Nevertheless, GAOfound that targeted state aid helped
                             by lessening the extent to which spending for local public services
                              declined in the two communities GAOvisited (see pp. 34-38).

                             GAOis making no recommendations.

                             GAO   did not solicit agency comments.
Agency Comments

                             Page 4                          GAO/HRD-W-96   Distressed   Communities   in New Jersey
Executive Summary

                   At the request of the Chairman of the Senate Committee on Finance, GAO
Purpose            examined the condition of public services in poorer communities in light
                   of recent declines in federal-local aid, including the expiration of general
                   revenue sharing. GAOvisited communities in three states to (1) examine
                   these conditions, (2) identify the range of local responses to cope with
                   them, and (3) determine whether state policies and actions have helped
                   to offset lost federal funds and maintain public services. This report is a
                   case study of Passaic and Bridgeton, two of the poorest communities in
                   New Jersey.

                   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. It also looks to them to help fulfill
                   national domestic objectives, such as economic development and protec-
                   tion of 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-per-year general revenue sharing (GRS)program
                   in 1986.

                   While GRSfunds were a relatively small part of most local government
                   budgets, they 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. In addi-
                   tion, poorer communities received more GRSfunds per capita than their
                   wealthier neighbors,

                   New Jersey enjoyed substantial prosperity in the 1980s. Yet not all of its
Results in Brief   communities participated in this economic expansion. New Jersey expe-
                   rienced large and growing disparities between poorer and wealthier
                   communities. Poorer communities faced more difficulties in coping with
                   the loss of federal funds and the expiration of GRS.These losses came
                   when spending for local public services in the two communities we chose
                   for our case studies-Passaic and Bridgeton-was      already declining.

                   Passaic and Bridgeton used some strategies to cope with their fiscal con-
                   dition and the loss of federal aid that helped to maintain local public
                   services with less revenues. However, these efforts were insufficient.
                   Thus, the strategies Passaic and Bridgeton relied on most were cutting
                   programs and postponing capital investments.

                   Page2                           GAO/HRMJ@B6
                                                            DMrewed Ckmmtitiea in NewJersey