HD56 - Intergovernmental Mandates and Financial Aid to Local Governments
Executive Summary: Local government operations are significantly affected by State and federal involvement through intergovernmental mandates and financial aid. Localities are dependent upon financial assistance to provide mandated services. While mandates are generally considered to be a legitimate means for implementing essential policies and maintaining standard levels of services, local officials are often critical of the manner in which mandates are implemented. In addition, local officials emphasize the burdensomeness of mandate enforcement without, as they perceive, sufficient monetary resources for compliance. In 1983, the General Assembly directed the Joint Legislative Audit and Review Commission (JLARC) to study State mandates on local governments and local financial conditions. The study found that although there was little consensus on the unreasonableness of specific mandates, localities repeatedly cited funding as a key problem with mandates. In addition, the study noted that many local governments had experienced fiscal stress, and some were facing eroding financial conditions. The General Assembly. through resolutions adopted in 1990 and 1991, requested that JLARC staff reexamine mandates and financial aid to local governments, and the division of service responsibilities between the State and local governments. The study is being conducted in two phases. Phase One, which is presented in this report, examines issues related to mandates and local financial resources. Phase Two, which will be presented prior to the 1993 General Assembly Session, addresses issues related to State and local service responsibilities. Many of the local concerns raised during the current study are similar to those expressed during the 1983 study. Those concerns include: • lack of flexibility in the implementation of mandates, • inadequate funding for mandates, • unequal taxing authority for cities and counties, and • lack of adequate taxing authority for all localities. Local concerns are exacerbated by the current economic downturn, as they were by the recession of the early 1980s. Despite the problems identified by local officials, overall the State has played a stable role in providing revenues to local governments. Conversely, the last decade has witnessed a dramatic decline in the federal role. Although significant new federal mandates have been imposed on localities in recent years, federal financial aid has decreased. This report summary briefly addresses the major findings and recommendations of Phase One of the study. More detailed analysis is included within the text of the report. A companion report, titled "Catalog of State and Federal Mandates on Local Governments," identifies the State and federal mandates currently imposed on local governments as well as some local concerns with those mandates. Recent Economic Indicators Suggest Deteriorating Local Fiscal Conditions During the second half of the 1980's, local governments experienced substantial growth in revenues due to strong national and regional growth. The median increase in revenue capacity per capita from FY 1985 to FY 1989 was 30 percent, while growth in the government goods and services inflation index was only 18 percent. Only ten localities' revenue capacity growth did not match the increase in the inflation rate for government goods and services. Despite the growth in revenue capacity, the second half of the decade witnessed a steady increase in revenue effort for both cities and counties. Only 30 local governments did not increase local revenue effort from FY 1985 to FY 1989. Since that time, local revenue conditions appear to have deteriorated. The 1990-1991 national recession has resulted in decreasing home sales, prices, employment, and retail sales. These conditions have begun to affect local revenues. In addition, State reductions in aid to localities have further impeded local governments' ability to provide mandated services within existing revenues. These pressures are reflected by the recent budget actions localities have taken to control expenditures. The number of local budget actions taken has more than tripled since FY 1988. The ability of many local governments to continue to provide existing levels of mandated services within available revenues is of concern. Local Concerns about Mandates Local officials reported several broad-based concerns with mandates, including the cumulative impact of mandates, lack of local input into the development of mandates, inflexibility of mandates, overlapping mandates, and inadequate funding to meet mandates. Local concerns were especially evident in areas where State and federal involvement has historically been significant or is becoming increasingly significant -- education and environmental protection, for example. JLARC staff found that in some cases these concerns are warranted: • Mandates are extensive, covering most areas of local government activity. • The number of mandates imposed on local governments increases yearly. • In some cases, mandates do not allow local governments sufficient flexibility in implementation. • Some mandates issued by State agencies overlap with each other. JLARC staff identified 338 State and federal mandates on local governments. Most mandates affect the areas of education, health and welfare, and public works. In recent years most areas of government have been affected to varying degrees by new mandates. JLARC staff identified 81 mandates imposed since the 1983 mandates study. Virginia's interest over the past few years in improving and preserving the environment has manifested itself in several new environmental protection mandates imposed on local governments. There has also been a substantial increase in education mandates. This increase can primarily be attributed to the 1988 revision of the educational Standards of Quality. The State has taken a number of actions to mitigate the impact of mandates on localities. For example, the State has demonstrated its interest in improving communication and cooperation between State and local government through an ongoing study of administrative requirements imposed on local governments. Through this effort the Administration intends to eliminate any unnecessary reporting and other administrative requirements on local governments. Some State agencies grant waivers from mandates for individual localities. Others form advisory groups, or convene workshops or meetings of interested parties, including local government officials, when developing regulations. Also, as part of Project Streamline several State agencies have instituted studies and other actions to provide more coordinated oversight and direction to local governments. Despite the State's actions, mandates are still a problem for local governments. Some of the more problematic mandates originated at the federal level, and therefore, few immediate changes can be made to streamline and reduce the impact they have on local governments. However, there are some options available to the State, addressed later in the summary, to ensure that local governments are better able to adequately meet mandate requirements. State Aid to Local Governments Has Been Stable, But Federal Aid Has Declined The State has assumed a significant role in assisting local governments with provision of services. Responsibility for providing assistance flows from constitutional provisions, statutory references, and historical tradition. Local governments receive three types of assistance from the State: financial, direct, and technical. Virginia devotes a major portion of its annual budget to providing this assistance to localities. The majority of State aid to localities is in the form of financial assistance. In FY 1990, Virginia provided more than $3.4 billion in financial assistance to local governments - a 110 percent increase since FY 1982. Further, the State has provided local governments with a stable source of funding. A 1985 JLARC report on local fiscal stress and State aid found that the State's share of total local revenues had increased to 32 percent, allowing the local share to remain stable despite continuing reductions in federal funding. By FY 1990, the State continued to maintain its share of local funding at 32 percent. However, local governments have increased locally-raised revenues from 60.6 percent to 62.7 percent, in part to compensate for the declining share of federal revenue. During the same time period, federal revenues declined from 7.7 percent to 5.2 percent of total local revenues. Reflective of its commitment to financial assistance, the State attempted to limit reductions in aid to localities in addressing the State's revenue shortfall. As such, reductions in State aid accounted for only 13.6 percent of the total budget reductions taken by the State to close the State's shortfall for the 1990-1992 biennium. Much of the State's financial assistance is distributed using methods that attempt to account for local need or ability to pay. In other words, localities with a lower ability to pay, as measured by revenue capacity and adjusted gross income, receive more State financial assistance per capita. Thus, localities in the Southwest and Southside regions of the State generally receive higher levels of State aid per capita than other areas of the State. In addition to financial assistance, the State provides direct services to local clients and local governments. These services are essentially expenditures made on behalf of local governments. For example, the State directly provides and pays for the construction and maintenance of non-interstate roads in most counties. Direct services free local financial resources which otherwise might have to be expended in providing these services. In FY 1990, the State provided more than $1.2 billion in direct assistance to local governments. Technical assistance, advice, or training provided to local governments is another form of State aid. Localities often request technical assistance to help them comply with mandated requirements. Through the JLARC staff's survey of local governments, localities generally reported satisfaction with the State's provision of technical assistance. However, some agencies which primarily play a regulatory role were rated less favorably. Policy Options To address the current economic downturn and local officials' concerns about mandates, a number of policy options have been identified. The resolutions directing Phase One of this study direct JLARC to examine additional revenue sources that could be used to provide services. The General Assembly has two broad options to increase local resources: increase local taxing authority and increase State financial aid to local governments. The advantages of both are that local governments would have additional funds to support mandated services, and thus would be better able to accomplish policy goals. However, these approaches may be dependent on the willingness of citizens to accept additional tax burdens. Options to improve the mandating process itself have also been developed. Equalize City/County Taxing Authority Differences between city and county taxing authority exist due to historical distinctions in the levels of services provided. However, increased urbanization and suburbanization of Virginia's localities have blurred these distinctions. Many counties are now required to provide levels of services similar to cities. Consequently, taxing authority between cities and counties should be equalized. The following recommendation is made: • The General Assembly may wish to allow counties taxing authority equal to that of cities. Provide Additional Taxing Authority During the 1980s, localities substantially increased their use of taxes. Many localities are currently using most of the taxes granted them. In addition, where taxing authority exists, local governments have been more likely to increase, rather than decrease, tax rates in recent years. Pressure to increase local taxes may mount as fiscal conditions continue to decline, and if local funding responsibilities are increased. Under such circumstances, additional taxing authority - either allowing new taxes or increasing the caps on current local taxes would likely be needed. The following recommendation is made: • If funding responsibilities of local governments are increased, the General Assembly may wish to provide cities and counties with additional taxing authority to help fund the additional responsibilities. Taxes that the General Assembly should consider include an addition to the local option sales tax, the meals tax without referendum, and the cigarette tax. In addition, the General Assembly may wish to consider raising the maximum rates allowed on certain local taxes, such as the transient occupancy tax for counties, utility license tax, and mineral taxes. Increase State Financial Assistance State financial assistance to local governments has been an ongoing, priority commitment of the State, and has been a relatively stable component of local government budgets. However, recent fiscal conditions have resulted in decreased State financial aid. The State revenue shortfall caused by the 1990-1991 recession required a reduction in aid to localities of more than $297.6 million. This has negatively impacted longstanding local programs such as elementary and secondary education. Therefore, the following recommendation is made: • When the State's fiscal climate and revenue projections improve, the General Assembly may wish to establish as a priority the restoration of funding for aid to locality programs which were reduced during the 1990-1992 biennium. As in the 1983 JLARC mandates study, program areas have been identified in which State financial aid is not consistent with State involvement or historical funding efforts. In particular, State financial assistance for environmental protection has not been consistent with the State's involvement in this area. While there has been an increase of 14 environmental mandates in the past few years, federal and State assistance has not been consistent with this expansion of responsibilities. Further, where financial data are available it appears these new mandates are or will have a substantial fiscal impact on local governments. Statewide funding goals need to be established to provide an equitable and stable source of financial assistance for specific programs such as environmental protection. Therefore, the following recommendation is made: • In order to promote stable and equitable funding for State-local programs, the General Assembly may wish to require a review of mandates in specific program areas to establish the full cost of implementing the mandates on local governments and to develop an appropriate basis for determining State-local funding responsibilities. The General Assembly may then wish to develop clear objectives for funding a share of program costs. Require State Payment for State Mandates House Bill 751 (State Payment for State Mandates Act) of the 1990 General Assembly Session proposed fully funding the cost of State mandates imposed on local governments. If passed, this legislation would have suspended most new laws and regulations requiring local provision of additional services without sufficient funding. A number of other states have generally similar policies. Their experiences suggest that such policies are not effective. While these requirements may result in the limitation or modification of mandates to make them less costly or obtrusive to local governments, the policies have generally not resulted in extensive funding of mandates. In addition, such policies have led to greater judicial intervention. Given the mixed results in other states, it appears the desired results may better be achieved in a more affirmative manner, as discussed in the next section. Improve Current State and Local Mandate Environment Due to the current financial conditions in Virginia, the short-term outlook for substantial amounts of additional State financial aid is not good. Therefore, five methods for addressing the effects of mandates on local governments are presented. These include: maintaining a catalog of all mandates on local governments, conducting a one-time review of all current mandates to identify areas where mandates could be relaxed or eliminated, implementing new mandates on an experimental or pilot basis, suspending temporarily selected mandates, and enhancing the fiscal note process. Catalog of Mandates. In order to recognize the impact mandates have on local governments, legislators and agency heads need to be aware of the number and extent of State and federal requirements. Several recent studies have recognized the importance of having comprehensive, up-to-date information about mandates. To this end, a catalog such as the companion document prepared for this study should be developed and updated annually. Over time, the catalog may point to areas where mandates are becoming excessive or duplicative. The following recommendation is made: • The Commission on Local Government (COLG) should maintain and periodically update a catalog of State and federal mandates imposed on local governments. On an annual basis, COLG should add to the catalog all new mandates imposed on local governments and delete those mandates which have been eliminated. In addition, a summary of the fiscal impact of the new mandates should be compiled into the document. One-Time Review of Existing Mandates. By performing a one-time review of the mandates they administer, State agencies could potentially identify areas where the burdensomeness of mandates could be relieved. Ideally such a review would point to opportunities for relaxation or elimination of problematic mandates. Mandates would be prioritized according to their necessity, thus allowing agencies to determine requirements not essential to local service delivery. The following recommendation is made: • The General Assembly may wish to require all State agencies imposing mandates on local governments to conduct an in-depth assessment of the mandates they are responsible for administering. Specific attention should be given to streamlining, reducing, or eliminating mandates where possible. Pilot-Testing or Temporarily Implementing New Mandates. It is often difficult to predict the actual outcomes of implementing specific mandates. Whether or not mandates will produce their intended results is not always identifiable prior to implementation. In order to gauge the effectiveness of mandates, they should, where possible, be pilot-tested in a representative sample of localities. This procedure will allow agencies to refine the mandates to achieve stated objectives as well as more completely understand the fiscal impact on local governments prior to statewide implementation. The following recommendation is made: • The General Assembly may wish to require State agencies, where appropriate, to implement mandates on a trial basis through local pilot programs prior to requiring all localities to implement the mandate. Where possible, a representative cross section of localities should be used for any pilot project. Temporary Suspension of Selected Mandates. State and federal mandates limit local governments' options to cut lower priority programs from their budgets in times of economic downturn. Therefore, if financial conditions worsen and State aid is cut significantly, suspension of some State mandates could help ease the fiscal stress local governments face. However, the short-term advantages of temporary suspension must be weighed against the possible long-term disadvantages before a final policy decision is made. The Code of Virginia currently authorizes the Governor to temporarily suspend certain mandates on a local government based upon application by that local government. Similar provisions could be made to allow the Governor to suspend an administrative mandate statewide based on the Governor's judgment that the mandate imposed an unreasonable financial burden on localities. The following recommendation is made: • The General Assembly may wish to amend § 2.1-51.5:1 of the Code of Virginia to allow the Governor to temporarily suspend selected administrative mandates identified as imposing extreme financial burdens on localities. Mandates to be suspended should be based in part on the results of the one-time review of existing mandates previously recommended. Amendments to this section of the Code of Virginia and resultant suspension should expire two years after enactment. Enhance the fiscal Note Process. It is important that legislators are aware of the fiscal impact of proposed legislation on local governments prior to the appropriate full committee voting on the legislation. The Commission on Local Governments is responsible for preparing fiscal notes for legislation potentially affecting local governments. Although the cost estimating process is generally sound, the current process is constrained by Virginia's short Session length. Further, the process: • does not provide cost estimates to the legislature in as timely a manner as desirable, and • does not identify all bills with a potential fiscal impact on local governments due to statutory constraints. The lack of time available to complete a fiscal note is a limitation inherent to the existing legislative system. The COLG is often unaware of pending legislation with a local fiscal impact prior to its formal introduction. These problems might be reduced by transferring the fiscal note function to the legislative branch. Evaluation of the fiscal impact on local governments could then theoretically start at the bill drafting stage. To enhance the fiscal note process, the following recommendations are made: • The Commission on Local Government should adopt as a primary goal the completion of cost estimates for proposed legislation before the legislation is first reviewed by the full committee. In addition, the Commission on Local Government and the Division of Legislative Services should jointly review and revise the procedures in place for notifying the commission of bills requiring a cost estimate. • The General Assembly may wish to amend § 30-19.03 of the Code of Virginia to require that legislation negatively affecting the revenue-raising ability of local governments, except those providing property tax exemptions in accordance with § 58.1-3610 through § 58.1·3621 of the Code of Virginia.be submitted to the Commission on Local Government for a fiscal impact analysis. • The General Assembly may wish to direct the Joint Subcommittee studying the legislative process to evaluate the consequences of moving the fiscal note process to the legislative branch. |
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