SD16 - Funding the State and Local Cooperative Health Department Program

  • Published: 1988
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 87 (Regular Session, 1986)

Executive Summary:
Senate Joint Resolution 87 (SJR 87), passed by the 1986 session of the General Assembly, directed JLARC to study the formulas used to distribute funds for the State and local hospitalization program. (SLH), and the State and local cooperative health department program (CHD). The resolution instructed JLARC to make recommendations for formula revisions and to include cost estimates for alternative plans.

This report reviews the current funding formula for the CHD program. It examines the methods for calculating the local shares of the program costs, and methods for distributing the State and local responsibility for program funding. The JLARC review of the SLH funding formula is contained in a separate report.

The Current Formula Has Limitations

The CHD program was created by the General Assembly in 1954. At that time, a formula was established to determine the percentage shares of the cooperative health department budget which would be paid by Virginia localities. This formula, which is based on the estimated true value (ETV) of locally taxable real property, represented an effort to incorporate some measure of local ability to pay for health services. The minimum and maximum local contributions toward the CHD program are set at 18 percent and 45 percent, respectively, ensuring that the State pays for a majority portion of each local CHD budget.

There are several limitations affecting the current CHD funding: (1) fund allocation is not based on any systematic assessment of community health needs, (2) ETV by itself is no longer an accurate measure of local ability to generate revenues to pay for CHD services, and (3) inflation has driven up the value of local real estate in all localities so that a majority of localities must pay the maximum share for the program.

The CHD funding formula has been a major source of discussion over the past several years. A variety of study groups and legislative proposals have attempted without success to bring about changes in some of the perceived shortcomings of the formula.

The Funding Process Should Address the Goals of Equal Access and Tax Equity

The funding of any State program is designed to promote certain goals. The success of the program itself is often dependent on how well the methods used to fund the program help to achieve those goals. When funds are distributed unfairly, or inequitably, the program goals cannot be effectively achieved.

In evaluating the various methods by which the State could fund the CHD program, two primary goals were considered: equal access to needed program services, and tax equity. The goal of equal access can be promoted by the explicit recognition of program costs to meet the need for health services. Tax equity can be achieved by ensuring that the proportion of resources required from local governments to fund health department services does not vary greatly across localities.

The lack of statutory and program guidelines to help define which types and levels of service should be provided by public health departments to meet community health needs precluded an in-depth analysis of CHD program costs. In addition, due to data limitations, significant variations among local health departments in the costs to deliver program services could not be validated by JLARC staff.

However, a systematic, rational system which recognizes the costs to meet the needs for the CHD program in each locality is essential to ensure that the funding system is equitable. This report recommends that the Virginia Department of Health review the processes by which it currently allocates funds and estimates costs for the CHD program. Emphasis should be placed on the systematic allocation of funds according to locality needs for public health services, and estimating the costs for services based on meeting these needs. The results of this review should be used to formulate future program budget requests.

More Can Be Done to Achieve the Goal of Tax Equity

The goal of tax equity is not promoted through the current formula for the CHD program, which is based on the ETV of real property in Virginia localities. The current formula does not promote tax equity because it is based on 1979 ETV levels, and it is not an accurate measure of revenues available to localities to pay for the CHD program. Localities now have many sources of revenue available to them besides real property ax revenues.

The current funding formula used to determine local shares of funding for the CHD program is clearly outdated. This report sets forth two alternative formulas based on local revenue capacity for determining local ability to pay for the CHD program. These alternative formulas will ensure that tax equity is achieved through the funding for the program.

Revenue capacity is a measure of the revenue-generating capacity of a locality, if statewide average tax rates are applied to each local tax base. The measure can be used to determine the local shares for the CHD program by converting it to a ratio which shows each locality's relative ability to generate revenues. The ratio is calculated by dividing each locality's per-capita revenue capacity by the statewide per-capita revenue capacity.

The first alternative formula for determining local shares of CHD program funding is based on the local revenue capacity ratio. This formula continues to require a statewide local share of 45 percent, and the maximum share for any individual locality is also maintained at 45 percent. It ensures that localities with the greatest abilities to pay bear appropriate responsibility for funding the program. Localities with lesser abilities to pay are provided with greater State assistance in funding the program.

The second alternative formula for determining local shares is also based on the revenue capacity ratio for each locality. However, each locality's share is adjusted to reflect the adjusted gross income of local residents in relation to statewide adjusted gross income. Adjusting the local revenue capacity ratio for income recognizes that localities with residents who have lower incomes may have greater difficulty in taxing at statewide rates. The second formula also maintains a local share of 45 percent.

The formulas presented in this report to determine local shares will account for local ability to pay for the CHD program. Both formulas are based on revenue capacity, and represent significant improvements to the current formula. The formulas do not measure need for the CHD program, however. Measuring need for public health services can best be accomplished through the VDH budget and fund allocation process. The use of a systematic, rational budget process along with either alternative funding formula will promote the achievement of equal access to needed services and tax equity.