By NORMAN WALZER and DAVID WARD
Walzer is associate professor of economics,
Western Illinois University, Macomb, and
Ward is a budget analyst with the state
Bureau of the Budget, Springfield. The
article is based partially on a study financed
by the Illinois Cities and Villages Municipal
Problems Commission and was prepared
while Ward was a research associate at W.I.U.
A big question looms for budget makers: Will Congress renew revenue sharing?
Launched in 1972, this new kind of federal aid
is due to expire this year. It provides a tenth
or more of local government funds in Illinois,
and over $100 million to the state. If it is cut off, some governments will feel the pinch
THIS IS the year of decision for General
Revenue Sharing (GRS). Begun in 1972,
this program will have provided $30.2
billion to state and local governments
when it expires December 31, 1976 —
unless Congress extends it. The revenue
sharing monies are allocated to state
and local governments to spend for
broad classes of general purposes in
contrast with the traditional practice of
grants-in-aid for particular programs.
But because of uncertainty as to what
Congress will do, no one can count on
this money in planning a budget after
1976. And if this relatively unfettered
form of federal aid is cut off, the fiscal
crisis facing many state and local
governments in the nation will be
significantly worsened. In the case of
Illinois, local budgets could lose 10 per
cent or more, and the state government
could lose $100 million. The loss of such
an amount today would wipe out the
general fund available balance in the
state treasury — this is a measure of
what GRS has come to mean in dollar
terms.
Because GRS represented a major
change in the method of allocating
federal funds to local governments, it
has attracted a substantial number of
critics. Some have favored more guidance from the federal government in the
use of these funds, while others favor
completely eliminating the program and
returning to the more traditional approach of providing grants-in-aid for
designated activities. In addition, there are those who question why we should
collect taxes and send the money to
Washington — and then turn around
and send it back to the states and local
units. Finally, with the White House
turning on the pressure for federal
budget cutting, some members of
Congress would like to respond by
axing the revenue sharing program.
How is this going to affect Illinois?
How have this state and its local units
shared in the distribution of the $30.2
billion appropriated for GRS over a
five-year period? What uses have they
made of the new money? What activities, by implication, will suffer or be discontinued if GRS is not renewed? And what are the prospects for Congress to
extend it or change it?
How GRS is distributed
Local Fiscal Assistance
Act of 1972 (Public Law 92-512), which
established GRS, was the product of
many compromises in Congress. One of
the most important compromises concerned the formula for distribution of
the money ($5.3 billion for the first year)
among state areas. The U.S. House of
Representatives formula favored the
highly populated and industrialized
states, such as Illinois. The Senate
formula favored low-income states with
heavily rural populations. The final
compromise retains both formulas (see
sidebar), and the Illinois share is based
on the House formula because it favors
Illinois more than the Senate formula.
Through June 30, 1975, as shown in table 1, the formula has entitled this
state and its counties, townships, and
municipalities to more than a billion dollars.
One-third of the amount allocated to
Illinois must go to the state government.
The remaining two-thirds goes to local
governments within the state — counties, townships and municipalities (cities
and villages). This two-thirds is allocated into shares for each of Illinois' 102
counties, using population, relative
income, and tax effort (see sidebar). The
allocation for each county is then
distributed among the county, township
and municipal governments in the
county. The county government's portion is based on its share of tax collections within that county, and so is the
share that goes to townships. (In the 17
counties that do not have townships, no
allocation is made to townships, of
course, so the GRS funds for these
counties are shared only by the county
and municipal governments.) After
removing the share for the county and
townships, the remainder is allocated
among municipalities, using the factors
of population, relative income, and tax
effort. Municipalities, as shown in table
1, receive the largest portion of the
revenue sharing monies going to Illinois
local governments.
School districts and other special
district governments (sanitary districts,
fire protection districts, etc.) are not
included in the federal law's definition
of local governments for GRS and do
not share in the distribution, nor are their tax collections counted in the tax effort formulas.
March 1976 / Illinois Issues / 3
'Many bills have been introduced in Congress containing some rather drastic changes in the revenue sharing program'
The allocation formulas are complex, but the federal Office of Revenue Sharing, a part of the Treasury Department, publishes the amount to which each governmental unit is entitled as well as the factors on which the amount is based. A recipient government can challenge the accuracy of the figures if it wishes.
The minimum payment which can be made to a governmental unit is $200; a unit whose entitlement is less than this amount receives nothing. No unit of government can receive more than 50 per cent of the sum of (1) its adjusted local taxes and (2) intergovernment revenue. The payment to a local government is also affected by a per capita test which limits the range of payments by eliminating the extremes. The standard here is the statewide average per capita of total payments to all local governmental units. A local unit is guaranteed a payment which, when computed on a per capita basis (payment divided by population) equals at least 20 per cent of the statewide average per capita but does not exceed 145 per cent of the statewide average.
How significant in Illinois?
GRS payments represent a substantial proportion of the income of local governments, as shown in table 2. For townships as a class, this source on the average accounted for almost 23 per cent of their income during the period July 1, 1973, through June 30, 1974; for the smaller cities (below 5,000 population) it represented 12 per cent on the average. Other classes of local governments fell between these extremes.
The table also shows average per capita amount of GRS by class of government. The largest average per capita amount, $9.32, went to municipalities of 5,000 and above. Municipalities under 5,000 were allocated the smallest average per capita amount, $6.59.
The table shows how the 145 per cent and 20 per cent limitations mentioned above affect these governments. Of 2,808 units of government in Illinois receiving GRS, approximately 680 were affected by one of the limits. A Ford administration proposal for renewing GRS, introduced early last year, would increase the upper limit of 145 per cent to 175 per cent. Table 2 indicates this would affect 42 Illinois units — that is, they would receive more. But note that no municipality of 5,000 or above would be affected by raising the 145 per cent limit. However, the bottom limit of 20 per cent did benefit 21 of the larger cities. Although much of the pressure nationally to increase the upper limit has come from large urban areas, Chicago was not constrained by the 145 per cent ceiling according to this data. A much more substantial impact would occur in Illinois if the floor of 20 per cent were altered.
But a problem for Chicago has been with the federal nondiscrimination provision which has been the basis for federal court action withholding GRS funds from the city. Alleged discriminatory hiring and promotion practices in the Chicago police department are involved. The amount withheld from Chicago is included in table 1, however.
How the money is used
Units of local government are permitted to spend revenue sharing funds according to "priority expenditures" as set forth in the federal act and in accord with state laws and regulations governing the use of state funds; a major exclusion from permitted spending is education.
To determine that funds are being used lawfully, recipient governments are required to file "Actual Use Reports" at the end of each payment period. For all intents and purposes these reports are the most comprehensive data available on the use of GRS funds. But Actual Use Reports have been criticized because they are ambiguous. The categories listed are broad, and local officials in two
4 / March 1976 / Illinois Issues
|
Table 1. Revenue sharing allocations to Illinois
governments, January 1, 1972-June 30, 1975
|
|
| |
Level of govt. Dollar amount Per cent |
|
State $347,441,827 33.3 |
|
Local governments
694,983,589
66.7 |
|
counties
(155,568,698) (14.9) |
|
municipalities¹
(448,312,636) (43.0) |
|
townships ( 91,102,255) ( 8.7) |
|
Total state & local $1,042,425,416 100.0 |
¹Includes payment (approximately $57 million) withheld from Chicago
because of the discrimination claim described in the text.
Source: Illinois Commission on Intergovernmental Cooperation |
|
different units of
government can report the same type of
project under different categories.
Second, there is a possible "displacement effect" because GRS funds can be
used for a particular purpose and
thereby free up locally raised funds for
other projects.
The inability to trace the use of funds
has been especially criticized by the
federal General Accounting Office, but
the problem is not unique to revenue
sharing. It exists, at least theoretically,
in virtually all intergovernmental fund
transfers (that is, grants-in-aid or shared
revenues).
The information reported by Illinois
governments during the period July I,
1973, through June 30,1974, is shown in
table 3. The use of per capita (per
resident) figures in the table permits
comparisons among governments of
different populations.
|
Because of the differing functions and
services provided by local governments,
one can reasonably expect there would
be substantial differences among the
uses reported. At each level of government, a larger number of governmental
units reported GRS spending for capital
projects than for operating and maintenance activities. This was probably to
be expected since capital expenditures
include buildings, equipment purchases
and other nonrecurring items. Because
of the temporary nature of revenue
sharing, local officials were advised
against initiating programs which could
not be maintained without a tax increase. Given a choice between a capital
project and a possible increase in
personnel, officials were advised to
choose the "one time" projects.
The amounts spent for capital projects also exceeded those for operating
and maintenance, except in the case of
counties. Although more counties (87) reported spending on capital rather than
on operating and maintenance purposes, the per capita amount spent on
the latter was $6.02, which exceeded the
$3.37 spent on capital projects.
The revenue sharing program has
been sharply criticized because it did not
stimulate more "people-oriented" programs. This criticism should be considered in the light of recent economic
trends. There is considerable evidence to
suggest that, at least in the case of
municipalities, the GRS payments
received by local units were not sufficient to offset the impact of inflation.
In this type of economic climate, one is
unlikely to find new and innovative
programs being developed since, in
many cases, it was a struggle to maintain
existing programs.
What will Congress do?
With budget preparations already
begun for the next fiscal year, local
officials are understandably concerned
about the future of GRS. Many bills
have been introduced in Congress
containing some rather drastic changes
in the program. Because the program
was not re-enacted last year, the proposals will probably become entangled
in the new Congressional budget reform
proceedings (see "Can Congress make
fiscal policy? New budget system on trial
this year," Jan. 1976, p. 31). This could
delay re-enactment until after mid-May
of this year.
At the close of 1975, more than 20
bills were pending before the House
Government Operations Subcommittee
on Intergovernmental Relations chaired
by Rep. L. H. Fountain (D., N.C.).
These included the administration
proposals (S. 1625 and H.R. 6558)
which would distribute $39.85 million
from 1977 through September 1982,
representing an annual increase of 2.5
per cent above the current funding level.
Other key factors of the administration
proposals involve: increasing the 145
per cent limit on payments (see above)
to 175 per cent over the renewal period
(six percentage points each year); requiring recipients to give notice to
citizens of intended uses of the funds
and the opportunity to participate in the
decision making; allowing the secretary
of the treasury to waive the publication
requirement for use reports and make
reporting requirements more flexible; and making GRS immune to the Congressional Budget Act's annual appropriation process.
The language of revenue sharing
HERE, excerpted from the federal act,
is the Senate's three factor formula for
determining the amount allocable to a state
area: "the amount which bears the same
ratio to $5,300,000,000 as —
(A) the population of the State, multiplied
by the general tax effort factor of the
State, multiplied by the relative income
factor of that State, bears to
(B) the sum of the products determined
under subparagraph (A) for all States."
The House's factor formula is even
more complex: "the amount to which
that State would be entitled if —
(A) 1/3 of $3,500,000,000 were allocated
among the States on the basis of population.
(B) 1/3 of $3,500,000,000 were allocated
among the States on the basis of urbanized
population.
(C) 1/3 of $3,500,000,000 were allocated
among the States on the basis of population
inversely weighted for per capita income.
(D) 1/2 of $1,800,000,000 were allocated
among the States on the basis of income
tax collections, and
(E) 1/2 of $1,800,000,000 were allocated
among the States on the basis of general
tax effort."
Every state's allocation must be figured
both ways and its allocation is based on the
higher amount. But because this approach
allocates more than the total available —
$5.3 billion in the initial period of GRS —
final allocations to each state are
proportionately reduced.
"General tax effort" is the net amount
of tax collections (State and local, or local,
as the case may be) divided by aggregate
personal income of the state or locality.
"Adjusted taxes" are taxes collected
for general purposes excluding amounts
allocable to expenses for education, special
assessments, and the like.
"Intergovernmental transfers" are
amounts of revenue received by a
government from other governments as
a share in financing the performance of
governmental functions — for example,
grants-in-aid.
"Relative income" is a fraction. In
the case of a state, the numerator of the
fraction is the per capita income of the
United States and the denominator is the
per capita income of the state. In the case
of a county area, the numerator is the per
capita income of the state, and the
denominator is the per capita income
of the county area. In the case of a unit
of local government, the numerator is the
per capita income of the county area,
and the denominator is the per capita
income of that unit.
Had enough?
March 1976
/ Illinois Issues / 5
Table 2. Revenue sharing allocations to Illinois local governments, July 1, 1973-June 30. 1974
|
|
|
|
No. of governmental units |
|
|
Per |
Per cent |
Total |
Affected by limits |
|
|
capita |
of local |
no. |
20% |
145% |
|
Level of gov't. |
receipts |
income¹ |
|
|
|
|
Counties |
$ 7.34 |
16.4 |
102 |
0 |
5 |
|
Townships |
8.74 |
22.7 |
1,436 |
391 |
24 |
|
Municipalities: |
|
|
|
|
|
|
Below 5,000 pop. |
6.59 |
14.5 |
1,018 |
233 |
13 |
|
5,000 and above 3 |
10.01 |
12.0 |
252 |
20 |
0 |
¹Approximated by the sum of intergovernmental transfers andadjusted taxes. Since this understates total revenue, the percentage is slightly overstated.
²See text for explanation of these limits.
³Includes Chicago.
Source: Office of Revenue Sharing and Advisory Commission on Intergovernmental Relations
Other bills receiving consideration
during the subcommittee hearings
included H.R. 8329, introduced by Rep.
Robert F. Drinan (D., Mass.), which
would extend GRS but require annual
appropriations and make rather sweeping changes. His bill would require
states and local units receiving at least
$500,000 to spend 10 per cent of their
allocations in each of the following
priority areas: public safety, environmental and consumer protection, public
transportation, health and recreation,
and social services and housing for the
poor and aged. States would have an additional priority area, education. The
bill would give each state government
the option of dividing its total GRS
money among the state and local
governments according to comparative
tax efforts rather than the present
division of one-third to the state, two-thirds to local units. The 20 per cent
minimum would be eliminated, and the
145 per cent ceiling would be raised to a
whopping 300 per cent. These changes
would affect many Illinois governments
as indicated in table 2.
Table 3. Actual use of revenue sharing by Illinois local governments, July 1, 1973-June 30, 1974
Numbers in parenthesis show number of units reporting an expenditure in category
|
…Municipalities…
|
|
Categories |
Counties .... Townships …. |
Below 5,000 |
5,000 and more |
|
|
(100) |
|
(1217) |
|
(819) |
|
(186) |
|
|
Operating and maintenance |
$6.02 |
(76) |
$5.02 |
(638) |
$4.63 |
(375) |
$2.89 |
(105) |
|
Public safety |
3.22 |
(65) |
2.40 |
(51) |
3.89 |
(165) |
2.08 |
(62) |
|
Environmental Protection |
.53 |
(13) |
.87 |
(30) |
3.62 |
(72) |
1.33 |
(28) |
|
Public transportation |
4.02 |
(25) |
7.13 |
(391) |
4.72 |
(94) |
1.48 |
(29) |
|
Health |
.61 |
(22) |
.80 |
(64) |
3.25 |
(54) |
1.21 |
(22) |
|
Recreation |
.19 |
(5) |
.50 |
(37) |
1.17 |
(61) |
.69 |
(25) |
|
Libraries |
.43 |
(3) |
.51 |
(31) |
.75 |
(28) |
.45 |
(12) |
|
Social services |
.33 |
(18) |
.58 |
(66) |
.64 |
(19) |
.48 |
(18) |
|
Financial administration |
2.11 |
(53) |
.40 |
(319) |
.91 |
(121) |
.57 |
(37) |
|
Capital |
$3.37 |
(87) |
$8.52 |
(979) |
$8.01 |
(672) |
$8.07 |
(170) |
|
Public safety |
1.93 |
(52) |
3.97 |
(112) |
4.85 |
(271) |
3.28 |
(108) |
|
Environmental protection |
.29 |
(6) |
1.26 |
(25) |
5.02 |
(104) |
4.04 |
(50) |
|
Public transportation |
1.78 |
(28) |
8.99 |
(689) |
5.31 |
(135) |
3.28 |
(42) |
|
Health |
.95 |
(9) |
1.71 |
(45) |
6.33 |
(124) |
3.19 |
(17) |
|
Recreation |
.10 |
(2) |
2.47 |
(56) |
3.44 |
(138) |
2.08 |
(42) |
|
Libraries |
— |
— |
1.27 |
(62) |
2.38 |
(30) |
1.17 |
(20) |
|
Social services — aged |
|
|
|
|
|
|
|
|
|
and poor |
1.83 |
(8) |
.70 |
(39) |
1.22 |
(9) |
.82 |
(5) |
|
Financial administration |
1.85 |
(17) |
.30 |
(106) |
.83 |
(43) |
.18 |
(13) |
|
Multipurpose and general |
|
|
|
|
|
|
|
|
|
government |
1.55 |
(49) |
4.02 |
(278) |
4.74 |
(191) |
3.06 |
(49) |
|
Education |
— |
— |
1.07 |
(10) |
1.23 |
(6) |
.11 |
(2) |
|
Social development |
.76 |
(4) |
.44 |
(7) |
2.57 |
(6) |
.41 |
(4) |
|
Housing and community dev. — — |
2.82 |
(34) |
5.46 |
(52) |
3.45 |
(6) |
|
Economic development |
.76 |
(2) |
1.87 |
(2) |
5.27 |
(32) |
.43 |
(7) |
|
Other |
.95 |
(4) |
3.42 |
(24) |
4.64 |
(15) |
4.73 |
(56) |
|
Source: Office of Revenue Sharing
|
Four bills would eliminate state
governments from receiving GRS: H.R.
8170 and H.R. 9245 by Rep. Robert H.
Mollohan (D., W. Va.), H.R. 9629 by
Rep. Jerry Litton (D., Mo.), and H.R.
10221 by Rep. Wilbur D. Mills (D.,
Ark.). Other bills would double the
allocation of funds (H.R. 4305); prohibit the distribution of funds except
when the federal budget is balanced
(H.R. 1318); require compliance with
the Fair Labor Standards Act (H.R.
9137); provide automatic cost-of-living
adjustments (H.R. 5687); and include
services provided by special districts in
the tax effort computation (H.R. 4607
and H.R. 5454).
Support for re-enactment is reported
to be fairly strong with particular
support from Sen. Edmund S. Muskie
(D., Me.), a long time advocate of the
revenue sharing concept who is now
chairman of the Senate Budget Committee. The administration proposal
attracted 35 senators and 51 representatives as cosponsors.
But opposition is strong, and Chairman Fountain of the House Intergovernmental Operations Subcommittee accurately predicted last year that reenactment would not occur in 1975. He
is said to be determined that his subcommittee will exhaustively examine the
current program before any legislation
is reported to the House floor. Both
Rep. Jack Brooks (D., Texas), chairman of the Government Operations
Committee, and Rep. Brock Adams
(D., Wash.), chairman of the House
Budget Committee, have come out
against continuation of GRS.
The Presidents proposed budget cuts
may also jeopardize re-enactment of
revenue sharing. Rep. Al Ullman (D.,
Ore.), chairman of the powerful House
Ways and Means Committee, is reported to have said, "It is the mood of
Congress to eliminate federal revenue
sharing — probably all of it — if that
body is called on to make severe budget
cuts." Finally, a perceived lack of active
campaigning on behalf of GRS by the
states and local governments is reported
to have had a negative impact on efforts
for re-enactment.
The prospects are for a spirited and
tough struggle over the continuation of
GRS. State and local governments
stand to lose a sizable amount of
revenue if the program is not re-enacted,
and the loss would come during a period
of unprecedented inflation. There is
little question that local taxes will be
increased in many areas if a revenue
sharing program of some kind is not
continued. Since property taxes and
sales taxes (the major sources of funding
for local units) are thought to be more
regressive than the federal income tax
(source of GRS funding), the prospect
of local tax increases is likely. Reverting
to a complex system of federal grants
rigidly earmarked for particular programs would have the effect of transferring local decisionmaking power to
Washington. Whatever the outcome, it
appears likely that local officials will
have to begin budget preparations for
the next fiscal year with considerable
uncertainty as to what they can expect
from federal revenue sharing.
6 / March 1976 / Illinois Issues