HD15 - State Mandates on Local Governments and Local Financial Resources

  • Published: 1984
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: House Joint Resolution 105 (Regular Session, 1982)

Executive Summary:
The State plays a major substantive role in the operations of local governments. Major elements of this role include:

• defining the forms and powers of counties, cities, towns, and other political subdivisions;
• granting localities the right to levy specified taxes, and for most taxes prescribing maximum allowable rates;
• requiring local governments to provide a minimum level of services in many areas, and to conform to extensive administrative procedures in other areas; and
• supporting a significant portion of local government activities through a variety of aid programs and direct services.

The long-term financial viability of local governments is dependent to a large degree on State action.

For their part, local governments must function within the legal, service, and financial framework crafted by the State. Local officials must raise revenues, appropriate funds, and set service priorities in an attempt to meet the service needs of local citizens. This task has been made more difficult in recent years by national economic conditions, declining federal aid to localities, and increased taxpayer resistance to local levies. A contributing factor has heen the failure of the State to fully fund some aid commitments. The result of these conditions has been widespread fiscal stress for many local governments. The levels and types of stress in the localities warrant action by the General Assembly.

STUDY FRAMEWORK

The General Assembly has focused much of its attention and effort on developing an appropriate relationship between the State and its local governments. In the past 12 years, 29 legislative studies have heen conducted to explore ways of improving and coordinating State and local responsibiIities.

During the 1982 session, the General Assembly began another re-examination of some aspects of State-local relations, through adoption of House Joint Resolution 105. The resolution directed the Joint Legislative Audit and Review Commission (JLARC) to study the responsibilities and financial resources of local governments. The General Assembly continued the study in 1983 by adopting House Joint Resolution 12.

The original study resolution charged JLARC to consider:

• responsibilities of local governments for providing public services, and the differences in the responsibilities of cities, counties, and towns;
• sources of revenue which are or could he allocated to local governments, and the adequacy of those sources; and
• the Commonwealth's responsibilities for providing public services, and procedures for aiding local governments.

The resolution also directed that·the study "identify to the extent feasible all local government mandates and related financial sources contained in each functional area of State government."

To ensure coordination between JLARC and standing committees of the Legislature, the study resolution designated a 12-member subcommittee to cooperate in study activities. Members were appointed from the House Committee on Counties, Cities, and Towns; the House Finance Committee; the Senate Committee on Local Government; and the Senate Finance Committee.

Principal Issues. At regional meetings held to solicit input from local officials and other interested persons, three concerns were most often voiced, (1) the burdensome impact of State mandates, (2) the need for additional State financial assistance, and (3) limits that have been placed on local taxing authority. The study workplan was therefore oriented to examine three principal issues:

(1) To what extent dp State mandates impose a burden on local governments?
(2) Is the amount and type of State assistance to localities adequate?
(3) Do local governments have sufficient financial resources to fund the public services they must provide?

Special Research Efforts. To address the study's central issues, research activities were designed to develop as broad an information base as possible. Four special research efforts were undertaken:

(1) a survey of State agencies, to identify mandates which apply to local governments;
(2) visits to selected case study localities, to explore how mandates affect local governments and to gather information about financial problems facing localities;
(3) a survey of local officials, to systematically assess local opinions about State mandates, State aid to localities, and local financial conditions; and
(4) an assessment of local fiscal conditions, to determine the degree which localities are stressed by stagnant revenue capacity, high tax efforts, and other factors.

STATE MANDATES

Virginia's local governments are fundamentally affected by State constitutional, statutory, and administrative mandates. State requirements affect the organization, staffing levels, services provided, administrative procedures, budgets, and spending of all local governments. In some cases, mandates require that local governments redirect their resources to meet statewide rather than local objectives. The impact of State mandates is therefore a continuing concern to local officials. The most frequent local complaint about mandates, however, is that they are rarely funded at adequate levels.

An inventory of State mandates showed that the State is extensively involved in specifying a minimum level of local services in many areas. This involvement is particularly great in education, welfare and social services, and corrections. Mandates affecting public works are also widespread, but focus on regulating services which localities are not required to provide. Mandates in other areas of local activity are less extensive.

The volume of State mandates does have a significant impact on local governments. There are several thousand State regulatory provisions affecting localities. It is a major task for local officials to absorb and comply with the large volume of detailed State regulations that are in effect. Nevertheless, most local officials do not judge most mandates to be unreasonable.

JLARC's survey of localities asked officials to assess the reasonableness of mandates in 19 areas of local government. The survey also asked officials to comment on specific mandates they found inappropriate·or unreasonable. Results showed that in only one area - special education - were mandates judged to be unreasonable by more than half of the responding localities. In 13 of the 19 areas, only one-fifth or fewer of the officials responding judged mandates to be unreasonable.

Very little consensus was found among local officials on the unreasonableness of specific mandates. Few specific mandates were cited as unreasonable by more than four or five local administrators. Moreover, no consistent pattern appeared to exist in the type of locality complaining about specific mandates. The comments received most often cited new mandates or mandates which have been recently changed. Mandates appear to be more a lightning rod of discontent for local officials than a significant substantive problem.

The JLARC staff's research was designed to examine concerns about State aid separately from concerns about the reasonableness of mandates. Nevertheless, local officials frequently linked dissatisfaction with mandates to levels of State funding. Local sensitivity to State mandates appears to be largely a concern with levels of State aid.

STATE ASSISTANCE TO LOCALITIES

Over time the Commonwealth has assumed a significant role in assisting local governments with services. Responsibility for providing assistance flows from constitutional provisions, statutory decisions, and historical tradition. In some cases, assistance is provided as recognition that local services provide benefits both for the locality and for the State as a whole. In some cases, assistance is provided because service delivery is regarded as a shared State-local responsibility.

The Comptroller estimated that in FY 1982, State assistance from all sources totaled $2.5 billion. Assistance to localities comes in the form of direct services provided to localities or clients by State agencies, financial assistance funneled through local treasurers, and technical advice or training provided to local officials.

The adequacy of State assistance was a central issue for this study. To assess adequacy, research was focused to determine whether the amounts of State aid have kept pace with local program costs and historical State commitments, and to identify areas where levels of State aid are not consistent with levels of State involvement.

Overall, State financial assistance to localities has comprised a stable proportion of local budgets. Without recent State initiatives providing aid to localities with police departments and assuming a greater share of the costs of some constitutional offices, however, State aid would have decreased as a share of local budgets.

For most major programs, State aid has at least kept pace with historical State commitments. State funding of local health departments has been stable at about 58 percent of approved budgets. State and federal funding of local welfare agencies has also been stable, at about 88 percent of total expenditures. And, State funding of Community Service Boards has increased considerably - from 50 percent of expenditures in FY 1979 to about 57 percent in FY 1982. In these areas, State funding has been at least consistent with historical commitments.

State aid for education, particularly important because it comprises over 70 percent of State financial aid to localities, has not kept pace with its historical commitment. Education accounts for well over 50 percent of all local government spending. Despite the State's extensive involvement in education, the State share of education declined from 46.3 percent of total operating expenditures in FY 1978 to 43.6 percent in FY 1982. A concurrent decline in federal aid for education has meant that localities have had to assume an increasing share of education costs.

This declining share of State funding of education is also reflected in a declining relationship between established funding of estimates of the cost of meeting State Standards of Quality. According to the Department of Education, the established SOQ costs have fallen from 82.4 percent of the estimated SOQ costs in FY 1975 to 78.0 percent in FY 1982.

There are two programs - categorical aid for special education and auxiliary grants - where levels of State aid are not consistent with levels of control. In special education, the State has funded a decreasing share of the added costs of educating handicapped children. This has occurred despite extensive State and federal involvement in requiring specific and widespread services. In auxiliary grants, the State funds only 62.5 percent of a program in which localities have no flexibility in the number of clients served or benefit levels. Costs for these programs have grown dramatically in recent years, and have heavily impacted some localities.

LOCAL FINANCIAL CONDITIONS

The financial integrity of local governments is vital to the Commonwealth. Local governments provide services which meet residents' needs, spur and influence economic growth and development, and improve the quality of life for all the State's citizens.

Local governments have experienced increasing financial stress over the past five years. Five principal causes of stress have been well-documented. First, the two recent economic recessions slowed the growth of tax receipts and increased unemployment. Second, the federal government has reduced aid to localities, partly to reduce budget deficits and partly to return program control to states and localities. Third, local taxpayers have become increasingly reluctant to support or accept tax increases. This reluctance has focused in large part on property taxes. Fourth, high interest rates have made local borrowing more difficult, or in many cases prohibitive. And fifth, many localities are faced with increasing needs to replace or expand high-cost capital facilities.

In response to these stresses, local governments have taken many of the actions available to them. Despite political hurdles, many have increased existing taxes and fees, or adopted new ones. Local govenments have also taken significant actions to control spending. Chief among these have been deferral of maintenance and capital outlays, and reduction in personnel positions through attrition. The levels and types of stress faced by local governments are sufficient to require action by the General Assembly.

The levels of stress affecting local governments are not uniform. Some localities show few signs of financial difficulty while others are stressed more seriously. On almost any dimension of comparison, cities of all types are more stressed than counties. Most city populations have the relatively high levels of poverty found in many rural counties. Cities have also faced for many years the high·service demands now being experienced by urbanizing counties. And, cities have been fundamentally affected by the higher per-capita benefit in State aid which has gone to counties. As a result of these factors, cities show much higher tax efforts than counties, and their local tax efforts have also grown more significantly over the past five years. And, cities have taken a greater number of actions to control or reduce spending.

The types of stress experienced by local goverments·vary·greatly. The·sources of stress experienced by rural and urbanizing counties, for example, are distinctly different. Rural counties are stressed by high levels of poverty among local residents, and by revenue capacities which are low and stagnant by statewide standards. Urbanizing counties, on the other hand, are pressured by high growth and by the need to build or expand schools, sewer and water systems, and other capital facilities. It is unlikely that any single policy action will equally benefit or address the disparate types of stress facing local governments.

TOWNS

Only limited information is available on towns. JLARC research and analysis relied on a survey mailed to the 130 towns with populations over 500. Eighty-five towns (65%) responded to the survey, and provided information about financial conditions, revenues and expenditures, and State mandates and aid. The responses provide a reasonable but limited basis for describing towns in Virginia.

For the most part, towns generally provide the higher levels of service demanded by urban areas within counties. Sevices provided by towns characteristically include sewer and water systems, public safety, and street maintenance.

State involvement in town activities is much lower than in city and county operations. Both State mandates and State aid are generally viewed as reasonable. Principal concerns are the appropriateness of State mandates for small towns, and requirements and lack of funding for sewer and water systems. As with cities and counties, however, the level of complaints is low, and there is no consensus about which mandates are particularly burdensome.

About one-third of towns responding do show some signs of fiscal stress. Some towns have taken actions to control spending and have increased taxes over time. Still, the levels of stress shown by these symptoms are much lower than those of cities and counties.

POLICY OPTIONS

JLARC research revealed that State mandates are not a substantive problem. Nevertheless, many mandated programs and services are not funded at levels consistent with the State's historical commitment. Further, many local governments are fiscally stressed, and State action is warranted to relieve this stress and aid localities in their efforts to fund service responsibilities.

In providing and funding required services and activities, local governments are dependent on State aid. This reliance has become more important as the federal government has increasingly withdrawn from full funding of its program commitments. Disruptions or declines in levels or shares of State funding create fiscal stress by forcing localities to choose between service reductions and increased local funding. If State mandates prevent service reductions, then localities have no choice but to pay. Part of the fiscal condition of localities is therefore determined by State decisions about levels of aid for specific programs. Although localities have not reached a crisis point, incremental action by the State to more adequately fund its mandates is warranted.

Recommendation (1): The State should either establish as a goal full funding of its mandated programs and services or commit itself to equitable, adequate, and stable funding of its aid to localities. Further, the General Assembly should consider establishing mechanisms for determining costs of its mandated programs.

Adoption of this recommendation would address principal local concerns regarding mandates and related State aid. While full funding, from the localities' point of view, would be most desirable, adequate State resources may not be available. Moreover, full funding would not reflect the partnership relationship that is desirable for some programs. In the absence of full State funding, the commitment to equitable, adequate, and stable funding would address many local concerns.

Neither of these goals, however, is immediately achievable because of a lack of (1) specific legislative commitments, (2) necessary information on costs, and (3) the availability of additional financial aid. Mechanisms can be established, however, to lay the groundwork for the achievement of either of these goals.

Specific Legislative Commitments. While the State has traditionally funded a share of most mandated programs, the level of State aid for most programs has been determined more by available revenue and legislative appropriations than by specific State commitments. As a result, the State and local shares of many mandated programs have fluctuated over time. For example, the State's established Standards of Quality (SOQ) cost per pupil declined from 82.4 percent of estimated costs in FY 1975 to 78.0 percent in FY 1982. The establishment of a statutory funding commitment would contribute to a stable and predictable State share of such costs.

Recommendation (1a): The General Assembly should promote stable and predictable funding of State-local programs by establishing in statute its commitment to program funding. The commitment should specify the share of program costs to be funded by the State.

Necessary Information on Costs. The stability and predictability of funding could be promoted by statutory commitments to specified funding levels. However, the adequacy and equity of the funding would depend on the level of funding committed and the accuracy of the basis on which the costs of programs were calculated.

If the State committed itself to funding a specific percentage of the estimated cost - per pupil of Standards of Quality, for example, it would be essential that the methodology for computing the cost be technically correct and that costs be reasonable. Systematic evaluations of the cost of major mandated programs would promote the adequacy and equity of the State funding.

Steps have already been taken in some areas to conduct such assessments. JLARC's study of the allocation of highway funds, which was mandated by the General Assembly in 1982 and 1983, is reviewing the equity of highway allocation formulas and the adequacy of maintenance spending, urban assistance payments, and aid for mass transit. JLARC could perform a similar assessment of the estimated per-pupil cost of the educational Standards of Quality as part of a scheduled study of the functional areas of elementary and secondary education. In addition, follow-up assessments should be made of the accuracy of fiscal impact statements for new mandates. Such assessments could provide a basis for reconsideration of a mandate if its fiscal impact had been underestimated.

Recommendation (1b): The General Assembly should promote adequate and equitable funding of State-local programs by directing an assessment and validation of the basis for sharing major program costs. In particular, JLARC should assess the method for estimating the cost of State's Standards of Quality. Such costing mechanisms should include methodologically rigorous studies and systematic reviews of the fiscal impacts of mandated programs on local governments.

Finally, better information on the effects of mandates would be available if local government organizations, such as the Local Government Advisory Council and other groups, would act as forums for identifying widespread problems with mandates and financial aid. While consensus on substantive problems with mandates does not currently exist, such organizations could serve as valuable conduits for identifying problems in the future.

Availability of Additional Financial Aid. As demonstrated in this report, the State share of several important programs has fallen in recent years. While the State may not wish to commit itself to additional funding of some programs·prior to validating estimates of program costs, JLARC research suggests that additional funding should be provided in several key areas. Specifically, these are the funding of the educational Standards of Quality, categorical aid for special education, and the State's share of auxilary grant funding. In each case, State control is high and localities were shown to have strong concerns about funding levels. For SOQ and special education funding, the traditional State share of costs has declined. Based on existing data, it is possible to estimate the amount of aid which would be necessary to meet existing State commitments.

The amount of additional aid needed is substantial. About $233.3 million in increased aid for these programs would be required for the FY 1984-86 biennium.

Recommendation (1e): Additional aid should be provided to localities to fund programs at levels consistent with the State's traditional level of commitment. Specifically, funds should be provided to fund (1) the State's share of 82 percent of the estimated costs of meeting educational Standards of Quality; (2) up to 28 percent of the added costs of special education; and (3) 80 percent of the Auxiliary Grant program.

Taken together, Recommendations 1, 1a, 1b, and 1e will help to address long-term and short-term problems associated with mandates and their funding. The recommendations do not, however, provide immediate full funding of mandates or fully address the underlying fiscal stresses which affect a locality's ability to fund its service responsibilities. Additional action is warranted to address the fiscal stresses shown in many Virginia localities.

ADDRESSING FISCAL STRESS

While the State is taking incremental steps to both define and meet its commitments (Recommendations 1-1c), many localities are experiencing fiscal stresses that may be largely independent of State mandates. An index which combines revenue capacity, tax effort, and level of poverty shows that Virginia's cities experience greater fiscal stress than the State's counties.

Another group of stressed localities are poor rural counties. These localities suffer principally from low capacity and high poverty.

While cities and poor, rural counties suffer clear fiscal stress as measured by the index, almost all localities show one or more specific symptoms of stress. Localities such as urbanizing counties, which appear to have a good fiscal balance sheet, still face high demands for services and are becoming increasingly dependent on the property tax. Most localities manifest some symptoms of stress and need some form of State assistance to meet their service responsibilities.

Recommendation (2): The State should take steps to assist stressed localities in their efforts to meet service responsibilities.

Because of the differing stresses that face localities, three independent approaches have been prepared:

a) distributing additional aid through a formula measuring fiscal stress;
b) balancing highway funding between cities and counties; and
c) equalizing taxing authority.

Distribution of Additional Aid Through a Stress Formula. Under this approach, the State would provide additional financial assistance to localities based on each locality's level of fiscal stress. The results of study research do not point to precise amounts of·additional aid which would be necessary to balance fiscal stress among local governments. It is possible, however, to use the key measures of stress - revenue capacity and tax effort - to develop a range of amounts which would meet general policy objectives.

As the table on page VII indicates, a substantial infusion of new aid would be necessary to balance the major causes of local fiscal stress. For example, $341.0 million in added State aid for the FY 1984-86 biennium would be necessary to bring localities with high overall stress levels down to moderately high levels. Policy objectives other than those listed could be used to develop different ranges. The total amounts would be offset substantially·if $233.3 million in funds were provided, as recommended, to meet traditional levels of State aid to education, special education, and auxiliary grants.

Recommendation (2a): The General Assembly should consider distributing additional aid to localities on the basis of a stress index or formula, as a means of balancing the fiscal stresses facing local governments.

Balancing Highway Funding. Highway funding accounts for most of the advantage that counties enjoy over cities in the area of State aid and direct services. This differential is currently under intense review in JLARC's study of highway allocations, and a final report is due. in December 1983. Because Virginia's cities as a class are the most highly stressed localities in the State, balancing differences in highway funding would contribute substantially to relieving fiscal stress.

Recommendation. (2b): Specific figures on the amount of State aid necessary to balance the benefits of highway funding will be available in December. At that time, the General Assembly should consider those findings and prepare recommendations which would both narrow the benefit gap and aid in reducing the fiscal stresses facing cities.

Equalizing Taxing Authority. A few localities in Virginia would benefit from the grant of additional taxing authority. Currently, Virginia counties and cities have substantially different taxing authority. At one time, these differences probably reflected clear distinctions between counties and cities. Today, with the existence of cities of extremely large geographical areas and with the urbanization of some counties, those differences are muted. Many counties in the State are now called upon to offer services which were once considered principally urban.

Some localities, particularly urbanizing or suburbanizing counties with relatively strong and diverse tax bases, could benefit from taxing authority similar to that afforded cities. Such authority could reduce the political stress encountered by localities which face strong taxpayer resistance to higher property taxes.

It must be noted, however, that equalizing taxing authority would do nothing to alleviate the problems of the most stressed communities. Cities already have the full taxing authority permitted by law, and show very high tax efforts. The benefits of added taxing authority would also be limited for poor, rural localities. These localities do not have sufficient revenue capacity or the local economic activity necessary to produce significant revenue through additional taxes. Still, equalized taxing authority would benefit some localities and, if offered generally, could provide counties with additional flexibility to meet their service responsibilities in the future. As a part of a package of legislative actions, additional taxing authority could meet the needs of some localities.

Recommendation (2c): The General Assembly should consider equalizing taxing authority between counties and cities.