The relationship between states and local governments is at a pivotal point. The relationship, built on an expectation that the state would pass revenue down to local governments to help fund services, is changing as an increasing responsibility for local governments to provide community based services is met with decreased funding.
The relationship between states and local governments, while not always harmonious, has remained fairly steady until recently. In this relationship, many states provided significant funding for various city, county, village or town projects, programs and services. [1] However, this model of governance, built on an expectation that the state would pass revenue down to local governments to help fund the needs of the jurisdiction, is disintegrating in the face of economic uncertainty. States are tightening their belts, and nearly all “are proposing to spend less money than they spent in 2008 (after inflation), even though the cost of providing services will be higher”. [2] As a result, many local governments are scrambling and wondering what they should do next. The relationship that many at the local government and state levels have grown accustomed to is changing. With the responsibility of providing community based services with decreased funding, local governments now bear more burden than ever to deliver for their citizens.
Even though the specific situations vary from state to state, there is one overarching theme: there isn’t enough money at the state or local level to provide the services that citizens have come to expect. Although states’ revenues are starting to rebound, only $6 billion in federal funding will be left for states in Fiscal Year (FY) 2012, compared with the more than $150 billion they received from FY 2009 – FY 2011, according to the Center on Budgeting and Policy Priorities. [3] City and county revenues continue to drop, with a decline of 2.3 percent in the fourth quarter of 2010, due primarily to declines in property tax collections. [4] These factors create the makings of intense budget showdowns and are presenting an uncharted route to the future of how states and local governments work together. A top elected official of Oneida County, NY, Anthony Picente, summarized the problem: “‘Part of the issue is the state, through all its budget talks, has been talking about shutting down state government,” Picente told Stateline this summer. “In essence, what they’ve done is slowly shut down county government’”. [5] While Mr. Picente is speaking about his state of New York, it is clear that his observations are applicable to more than just New York and more than just counties—he is speaking of a national issue facing almost every state and local government.
Right now, it may be unproductive to try to assign blame for the situation states and local governments face. However, it is helpful to look at how each state is confronting the problems and what this means for the ongoing relationships between states and local governments. The burden that states once carried to fund local governments or provide direct services is being shifted downstream. Based on the loss of their own revenues and shifts in state support, deep cuts have already been made. Local governments have shed approximately 416,000 jobs or approximately 3% of their workforce since the peak in 2008. [6]
But it is not just cutting funding or shifting costs that is taking its toll on local governments. While forcing local governments to do more with less, some states are also limiting local governments’ options to increase revenue. According to the Associated Press, “In the past year, at least 10 states have imposed or called for new limits on the ability of local governments to raise taxes, including a least a half dozen plans currently pending in state legislatures”. [7] The increased pressure on state governments has understandably led to cost reduction measures, but restricting the ways in which locals can increase revenue to make up for the decreases they are experiencing does not lend itself to any improvement in their already shrunken budgets.
In the following chart, view how the changing relationship between states and local governments is shaping up as reductions in funding local governments takes place at the hands of the states. The examples show that funding for local governments is being targeted in many states, even as the need for local services remains high. While state governments aren’t necessarily “forcing” the local governments to pay for or further reduce services, they are providing them with little cover.
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Arizona
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From FY 2008 – FY 2011, Arizona counties have lost more than $193.6 million collectively. [8]
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Massachusetts
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Governor Patrick proposes cutting $65 million, or 7%, in non-education aid to local governments. [9]
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Minnesota
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A plan by the Republican senate in Minnesota would reduce aid to the cities of Minneapolis, St. Paul and Duluth by $250 million while also reinstating a cap on property taxes. [10]
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Nebraska
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Governor Dan Heineman of Nebraska signed a pair of bills cutting aid to cities by $44 million. [11]
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Nevada
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Governor Brian Sandoval proposes shifting financial obligation of several joint state-county services to the counties alone. This will require counties to find at least $100 million extra in revenue or adjust or eliminate the programs. [12]
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New Hampshire
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Governor Lynch of New Hampshire proposes eliminating state contributions to public employee retirement accounts. This results in local governments having to foot the $50 million per year bill or cut benefits. [13]
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New York
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Governor Cuomo of New York has proposed cutting 2% of all aid to local governments, while simultaneously limiting municipalities and school districts ability to raise revenues through increases in property taxes. [14]
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North Carolina
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Governor Purdue proposes shifting future school bus replacement to local governments, while also eliminating grants to prevent high school dropouts. [15]
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Ohio
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Governor Kasich of Ohio has proposed cutting over $1 billion in aid to local governments and libraries. [16]
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Texas
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Cuts in Texas’ budget plan would eliminate almost 10,000 state jobs, such as prison guards and child protective service investigators. [17]
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So what does this all mean for the changing relationship between the states and their local governments? Local governments are in a position to be more self-sufficient and autonomous. In places where the state legislatures will allow them, they can assume more responsibility over their financial wellbeing and develop a new model of governance without being either hamstrung by the desires of the states or dependent on the state for resources. With reduced funding, fewer positions and changing employee compensation models, local governments are seeking new approaches to confront their challenges. In some cases, states are allowing local governments more autonomy. As some states begin to remove barriers that prevent cross jurisdictional collaboration, local governments can explore partnerships to reduce service delivery costs while increasing efficiency.
However, there are roadblocks that obstruct this shift to greater self-sufficiency. Some states are reducing revenue options as noted earlier. In addition, states around the country are struggling to make their annual required contributions to public employee pension plans. As a result, many states are considering or making wholesale changes to public employees’ pension plans that have a direct impact on local governments but giving local governments limited opportunities for input. There are also prominent cases of state-imposed changes in labor-management relations at the local level.
Some Governors are taking active roles to make up revenue lost as a result of the recession by attempting to increase tax revenue. For the next budget year, six states [CA, MN, NC, HI, MA, CT] include new revenue generating measures, such as raising state’s income tax (CA), eliminating certain tax deductions (HI), creating a new high income tax bracket (MN), adding additional brackets (CT) and extending temporary tax increases (NC). Connecticut and Rhode Island are both expanding the sales tax base to include more services. It is this type of multi-faceted action that “limits the harmful impact of budget shortfalls on the economy” and helps protect services local governments provide. [18] This is an alternative for citizens to consider: cutting is not the only means to a return to prosperity.
In that vein, communities are taking action to educate citizens on the value of local government, encouraging them to see the benefits of the work of local governments. One such project, conducted by the Minnesota League of Cities and discussed in detail later in the publication, seeks to put the focus on citizens and engage them in the process of deciding which services the cities should provide. The more connected to the process the citizens are, the more likely they will be to choose to retain certain programs and services cities provide them. The future of local government, while uncertain and tenuous, relies on the involvement of the public in every step of the way. With the changing fiscal relationship between states and local governments, there is an opportunity for citizens to play a more decisive role in determining the path ahead.
In the accompanying articles, local government experts will reveal some of the examples of the changing relationships as we place a focus on the issues in Arizona, California, Florida, Maine, Minnesota, Ohio, Texas, and Wisconsin.
Sources
1. Overall, states provided 19% of municipal revenues and 34% of county general revenue in 2002. The cities in 29 states received more than 10% of their revenue from the state, and the counties in 24 states received more than 20% of their revenue from the state. U.S. Census Bureau, Government Finances, 2002.
2. Johnson, Nicholas, Michael Leachman and Erica Williams. “Governors Are Proposing Further Deep Cuts in Services, Likely Harming Their Economies.” Center on Budgeting and Policy Priorities. March 21, 2011. Web. April 25, 2011. <http://www.cbpp.org/cms/index.cfm?fa=view&id=3389>.
3. Johnson, Leachman, and Williams
4. “2010 Taxes: For States, Strong Growth. For Local Governments, a Painful Lag.” Nelson A. Rockefeller Institute of Government, University of Albany. April 19, 2011. Web. April 20, 2011. <http://www.rockinst.org/newsroom/news_releases/2011/04-19-SRR83.aspx>.
5. Vock, Daniel C. Staff Writer, “Unpaid state bills shift burden to local governments.” Stateline, October, 21, 2010. Web. April 18, 2011. <http://www.stateline.org/live/details/story?contentId=522290>.
6. Federal Reserve Bank of St. Louis. Graph: All Employees: Government: Local Government (CES9093000001). April 22, 2011. <http://research.stlouisfed.org/fred2/graph/?g=8s>. Web. April 19, 2011.
7. Associated Press. “Tax Caps Creating New Hurdles For Towns, Schools.” abcnews.go.com. April 6, 2011. Web. April 16, 2011. <http://abcnews.go.com/US/wireStory?id=13311007>.
8. Murray, Matthew, Sue-Clark Johnson, Mark Muro and Jennifer Vey. “Structurally Unbalanced: Structural and Cyclical Deficit in Arizona.” Brookings Mountain West, UNLV and ASU Morrison Institute for Public Policy.
9. Johnson, Leachman, and Williams
10. Associated Press
11. Ibid.
12. Johnson, Leachman, and Williams
13. Ibid.
14. Ibid.
15. Ibid.
16. Ibid.
17. Ibid.
18. Ibid.