RD425 - Report on Local Government Consolidation Incentives - November 24, 2015

Executive Summary:
The Commission on Local Government (CLG), a five-member body appointed by the Governor, promotes and preserves the viability of Virginia’s local governments by fostering positive intergovernmental relations. The Commission assists counties, cities and towns in the Commonwealth in several ways. These duties include the review and publication of advisory reports and provision of technical assistance on boundary change and governmental transition issues; publication of an annual catalogue of state and federal mandates on local governments; and development of an annual report analyzing the comparative revenue capacity, revenue effort, and fiscal stress of Virginia’s cities and counties.

Recent local government transition cases led to a study by the Joint Legislative Audit and Review Commission (JLARC) of the state’s role in providing special funding incentives to localities undergoing consolidation or reversion. The bulk of these incentives were directed toward school division consolidation while other incentives provided hold harmless funding for certain local resources for a period of 15 to 20 years. JLARC’s study revealed that Virginia’s approach was potentially high-cost with some possible consolidations exposing the state to at least $32 million annually. The analysis also revealed that the approach was arbitrary and originated to address one specific local circumstance. As a result of this study, the General Assembly ended the school division consolidation incentives and directed the CLG to “...develop a process to determine an appropriate calculation for additional state funds for future local consolidations…" (Item 107, Chapter 665, 2015 Acts of Assembly).

The Commission, through research and consultation with a variety of stakeholders, identified five recommendations to address local government consolidation and reversion in the Commonwealth. The Commission would like to emphasize that these recommendations would incentivize two different approaches to consolidation or reversion: full consolidation and contractual operational consolidation. The latter option is an intergovernmental agreement tool not previously incentivized that could assist many fiscally stressed localities with improving local fiscal sustainability and achieving local service improvements without having to overcome the significant local identity barriers that usually impeded consolidation. The Commission is also recommending use of its annual Fiscal Stress Index in lieu of the local composite index (LCI) of ability to pay as the primary input for the school division consolidation incentive formula. The remaining recommendations address the administration and duration of special funding incentives in the event of a consolidation or reversion.

The five recommendations – in summary – are as follows:

1. Avoid creating additional barriers to the reversion or consolidation process.

2. Provide matching funds for localities to study the feasibility of consolidation or reversion.

3. Reduce the duration of hold harmless and special funding for school divisions to five years.

4. Redesign the school division consolidation incentive formula.

5. Provide incentives for joint contracting of school services as a first step toward full consolidation.