, United States General Accounting Office Report to the Chairman, Committee on T* Finance, U.S. Senate Ally 1990 DISTRESSED COMMUNITIES Public Services Declined in New Jersey Despite Targeted State Aid GAO/HRD-90-96 D-236433 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. 15-16). 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 Contents Chapter 4 34 State Aid Offset the New Jersey Shows Concern About the Problems of Poor 34 Municipalities 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. Average 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 Program 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 (1972-87) 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 1985) Page 7 GAO/HRD@O-Ml D&rewed Communideu In New Jersey Page 9 GAOpIRIHW% Distressed Communities in New Jersey chapter I introduction 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) 90 80 70 60 !I0 40 30 20 10 0 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 Introduction 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 hlmoduction 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 Wroduction 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 hWOdWtiOIl 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 municipalities1 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 community 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 shift. 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 hours. 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 Used Page 31 GACWRD-WB6 Didreseed Chnnmnities in New Jersey chapter3 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 crimes. 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 . Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 The first five copies of each report are free. Additional copies are $2.00 each. There is a 25% discount on orders for 100 or more copies mailed to a singIe address. Orders must be prepaid by cash or by check or money order made out to the Superintendent of Documents. United States First-Class Mail General Accounting Office Postage & Fees Paid Washington, DC. 20548 GAO 1 Permit No. GlOO 1 Offkial Business Penalty for Private Use $300 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 Office (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 shows. 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 Municipalities . create an adequate balance between local resources and local service responsibilities, 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 costs 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 following: l Bridgeton eliminated its rescue squad. l Bridgeton eliminated its city bus service when it lost federal matching funds. . 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 replaced+ 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 citizens. . 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 Chapter3 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% Bridgeton’ 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 recreation. 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 ~~~- “-~~. ..--.._ Income-indi~kfual 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 77 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) 140 130 120 110 100 so 80 70 60 50 LsmThanm% 8a%toeB% Grmlrnmn llr% 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 Sources ‘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 Introduction Figure 1.4: Case Study Municipalities in New Jersey Passaic 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 Methodology . 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 problems. To accomplish our first objective we reviewed trends in direct federal- local aid and drew from our earlier research on trends in the intergov- ernmental system. We then visited poorer communities in 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 Chapter1 htrOdWXi0n 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 services. 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 IKltrodUCtiOIl 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 recipients. Although President Reagan shared President Nixon’s decentralization goals, he gave higher priority to federal tax cuts and reducing domestic spending than to sharing federal tax revenues with state and local gov- ernments. 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 Introduction Figure 1.2: Trends in Federal Aid to Local Governments (1972-87) 3oooo lalstalll1992 Dolklm In Yllilanm 29ma 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 Introduction Local governments are the workhorses of domestic policy. However, they do not carry out their responsibilities alone. In our federal system of government, responsibilities are shared as well as divided. From the 1960s until the end of the 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 Contents Abbreviations FY fiscal year GRS general revenue sharing Page 8 GAO/HRDW98 DistRBeedCommnnitieain NewJersey Contents Executive Summary 2 Chapter 1 Introduction Local Governments Are Major Providers of Basic Public Services 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 Imbalances 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 Targeted 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 Resources 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 ExecutiveSummary 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. 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
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)