Article in Politics
Mandate relief and increased revenue authority could go a long way toward helping localities to become more self-sufficient.
 
 
 

The following is based on a report on state-local relations I made for inclusion in the Municipal Year Book, published by the International City/County Management Association. Here is a short discussion of the nature of these relations and of problems concerning local home rule and local government finances.[1]

State legislatures in the mid-19th century were, in effect, “spasmodic city councils” that directly controlled the actions of local officials and interfered at will in local government affairs. In response, local officials and various civic groups began a long quest for home rule, the essence of which increases a local government’s ability to initiate action and gives it greater protection from state interference in local affairs. Over the years, the view that local governments should have home rule has gained ground: some degree of home rule is available for municipalities in 48 states, and county governments have such powers in 37 of the 48 states with viable county governments.

Home rule status, however, generally has done little to change or even challenge fundamental assumptions about the legal status of municipal or other local governments. Although municipalities and counties with home rule authority are generally better off than those without, local governments with or without home rule have only limited power to initiate action and must spend much time and energy trying to ward off state mandates, preemptions, and prohibitions that would further limit their authority. They also have to worry about state takeaways and cutbacks in revenues they have been depending upon.

State officials often rely on their legislative and regulatory authority to compel local units to follow certain procedures, make changes in existing programs, or assume new program responsibilities. State mandates – whether they come the form of statutes, executive orders, or administrative regulations—range from the important to the inconsequential.

Some mandates cost relatively little money, but their aggregate effects can be staggering, and the big-ticket items, in areas such as health care, education, and environmental protection, can overwhelm local government budgets. Local officials appear willing to live with most mandates if those mandates are at least partially funded; given local governments’ financial constraints, they are hard put, without state funding, to both provide mandated services and address local priorities. In some cases, increased local costs are the products of end runs by local government employees who succeed in securing benefits through state legislation that they could not obtain through collective bargaining. As a result of such efforts, some states require local governments to pay police officers and firefighters what some observers consider to be overly generous pension benefits.

Local officials and their associations regularly try to fend off mandates—or, failing that, to limit their financial impact. They have sometimes obtained a legislative pledge of additional state funds to cover the costs of new mandates—but, over time, legislators have not always been willing or able to live up to their agreements. Local governments have also sometimes succeeded in gaining the authority to raise the revenues needed to meet the costs of a new mandate; this outcome is not all that desirable, however, because local officials who raise taxes in order to comply with a mandate risk incurring the wrath of their taxpayers for programs demanded by the state.

For local governments, the mandate problem is something of a no-win situation: even if a state decides to relinquish a long-standing requirement that localities provide a particular service, municipalities or counties may have no choice but to fund and provide the service anyway because their citizens want it continued. When it comes to ending or slicing state funding for specific programs legislators are often drawn to those that localities find politically difficult to abandon. State legislators can suspend funding for locally popular programs knowing that local officials are likely to find some way to keep them going.

Along with demands that they do certain things, local governments confront a range of “thou shalt not” directives. In some cases they are simply prohibited from taking certain actions. In other cases localities may be prevented from taking certain actions because they conflict with state law. Local action may also be preempted even if the state has not acted, simply because a given activity is reserved to the state.

Some of the historic battles over preemption have involved the regulation of tobacco and guns. Over the years the tobacco industry has attacked local smoke-free air local ordinances on the ground that this is an area of activity reserved to the state government. Often local ordinances have been replaced by less restrictive statewide smoking regulations. From the local point of view, the best state laws serve as a “floor,” not a “ceiling,” and allow local communities to pass even stronger anti-smoking laws than those set by the state. Thanks in large part to the National Rifle Association, 46 states prohibit or restrict local gun-control ordinances. Local officials have argued that gun control is a local issue, and that local governments should be free to pursue whatever policy works best in their communities: while there may be little need or support for gun control in rural areas, a special effort is needed to curb violence in urban areas heavily affected by crime and that gun control is an important part of that effort.

State prohibitions and preemptions often address every day local government decisions on personnel and other internal matters. Of importance in several states over the best several years have been the efforts, sometimes supported by groups of local employees such as police and firefighters, to eliminate local residency requirements for municipal workers. Supporters of state actions to end residency requirements argue that the state has an interest in safeguarding employees’ freedom of movement and that ending residency requirements will help cities attract teachers, public safety officers, and other needed workers. Those in favor of residency requirements contend that being a part of the community they serve strengthens public employees’ job performance and commitment to the community—which, in turn, helps foster positive attitudes among community residents toward municipal workers. Supporters of residency requirements also view them as a means of keeping well-paid, middle-class people in cities, and cite as an additional virtue the fact that residency requirements can help reduce response times during emergencies. More generally, state prohibitions are criticized on the ground that decisions regarding local residency requirements, whatever their merits, should be made not by the state, but by the local governments involved.

Local financial management is especially restricted by state law. State constitutions and statutes impose controls on assessment, taxation, indebtedness, budgeting, accounting, auditing, and fiscal reporting. In the area of taxation, for example, states may prohibit certain types of local taxes (e.g., a sales tax or a graduated income tax) and may limit increases in tax rates or property tax assessments. In a half-dozen states, the amount of total revenue that can be raised is tied to measures such as inflation, population, and growth in personal income, and all funds raised over the limit have to be refunded to taxpayers. Finally, many states require voter approval for tax increases and for spending increases above a certain level.

Legislative prohibitions often reflect a particular group’s desire to minimize, if not completely avoid, government taxation. Local officials, for example, continuously fight efforts at the state level to limit local sales tax authority. A few years back the Oklahoma legislature considered no fewer than 36 requests for sales tax exemptions, many of which were granted. One Oklahoma municipal official likened the stream of sales tax exemptions to “death by a thousand duck bites.” Tax exemptions can significantly reduce the flow of funds into local treasuries and can be as financially devastating as unfunded mandates. State legislators are attracted to certain proposals—such as raising the homestead exemption on property taxes or granting sales tax exemptions—both because they are politically popular and because they carry no costs to the state.

Many restrictions have to do with the property tax. Local governments are heavily dependent on this source. In recent years, however, the property tax base has been significantly diminished by state imposed assessment limitations, tax caps, expanded exemptions, and various other relief measures designed to reduce property tax burdens.

State and local officials commonly debate over who is responsible for the increases in property tax levels: state officials point to local governments’ failure to tighten their belts sufficiently, and local officials contend that the state is responsible because it has cut local aid, forcing localities to turn to the property tax, and has not allowed localities to seek out other locally collected revenue sources.

In recent years, many localities have struggled not only to secure new revenue sources, but also to protect the ones they have from being used by the state. Legislatures have, at times, simply dipped into local tax revenues and used them for their own purposes. Some of the most dramatic battles have been in California —where, beginning in 1992, municipalities, counties, and special districts lost close to $3 billion a year in property taxes because the legislature decided to draw on this source to pay for education. In the course of the decade, the legislature also took away other local taxes and fees—for example, on alcohol, cigarettes, and mobile homes—often without reimbursing local governments. Reforms were made to help protect local revenues the state, faced with a massive budget deficit, has continued to divert various local revenue sources and borrow local property taxes to help balance the state budget. In 2008, in what looked more like a holdup than an ordinary takeaway, Arizona local officials were caught off guard by a provision in the 2008 state budget package ordering them to donate nearly $30 million to the state general fund—to the tune of $17 million from municipalities and $13 million from counties.

During the current budget crunch local officials have been doing what they can to protect various state aid programs coming to them in the form of grants or shared revenues. Some of the shared revenues go to local officials for specific programs such as highways and some go to them as general revenue they can use for a variety of purposes.

State aid has been a major source of local revenue, accounting for more than one-third of all local general revenue. But aid to local governments, state aid is not dependable—a characteristic that makes it more difficult for local governments to plan budgets and borrow money. The amount tends to ebb and flow with legislative moods and changing economic conditions. Because state aid is based largely on sales and income taxes, it can be relatively high in times of prosperity but relatively low when the economy is in trouble. Even in times of widespread prosperity, however, aid may be limited because it competes poorly with demands for tax relief and for other expenditures. Moreover, even in good economic times, state aid may not fare well because lawmakers, for ideological or political reasons, do not look favorably on the aid system; as a Wisconsin legislator declared nearly a decade ago, “I don’t view my role as being an ATM machine for local governments.”

During 2009 states commonly targeted local aid program cuts. Local officials had to prepare for several rounds of state budget reductions as deficits continue to grow and more cuts had to be made. Often this meant that local governments had to suddenly absorb the loss of state money halfway through their own budget years. When it comes to general revenue sharing, local officials in several states argued that in establishing these programs, localities did not get something for nothing. To the contrary they were given a guaranteed revenue stream from the state in exchange for giving up a variety of locally generated revenue sources or agreeing not to adopt particular taxes, for example, an income tax, on the local level. They now argue that if states are going to cut back revenue sharing, localities should be given the ability to make up for the money lost by either regaining tax sources they had given up or by being given additional authority to raise revenues.

Although local home rule is still of some importance as a legal concept, the world of local officials is filled with state mandates, preemptions, prohibitions, and revenue takeaways. In addition, state aid programs—especially those under which state revenues are shared with local governments for unrestricted purposes—have become an endangered species.

Throughout the country, state officials are relatively free to act without concern for how their decisions might affect local authority. State officials, moreover, have generally been unwilling to allow localities to govern themselves. In some states legislatures and courts have whittled down the value of county and municipal home rule and made it difficult for local governments to function effectively.

The absence of broad and clear grants of local discretion means that local government authority is unstable—continually defined and redefined through litigation, and through an endless flow of special legislation. States would do well to clarify and strengthen home rule—and to increase, when possible, local discretion to deal with matters that are of no great concern to the state or that should be decided in light of the needs and priorities of particular communities. State intervention carries the double risk of transferring control to authorities that have little knowledge of local problems, and of contributing to the neglect of what are properly state duties.

In a broad sense, state and local governments are in the same boat when it comes to gathering revenues: both are subject to the ups and downs in the general economy and to shifts in public attitudes regarding taxing and spending. When times are bad for the state, they are also likely to be bad for local governments. Unfortunately, how the state responds to its own difficulties may make matters even worse for local governments. State officials think of mandates and takeaways as “burden sharing”; local officials think of them as “burden shifting.”

State governments have helped local officials meet their financial responsibilities by extending aid and picking up the costs of various functions; however, given the current condition of state budgets, neither course is feasible or likely in the immediate future. Still, states can greatly ease the pressure on local property taxes by eliminating or at least delaying the implementation of various mandates and by expanding local revenue-raising powers. Mandate relief and increased revenue authority could go a long way toward helping localities to become more self-sufficient. They would also better equip localities to weather current and future economic downturns. In building a revenue structure, localities need state cooperation to secure a balanced set of taxes—including sales or income taxes, which yield plentiful revenues when the economy is good but lose value when it is bad, and a property tax, which comes in handy during a recession but is not as responsive as other taxes to economic growth.

Notes

1
State-Local Relations: Authority and Finances
This e-document is an article included in The Municipal Year Book 2009.
Description: In recent years, local officials throughout the country have had ongoing concerns about how state mandates, prohibitions, and preemptions affect their authority, and about the lack of state fiscal support for local government. By the end of 2008, these concerns were exacerbated by the nation’s economic downturn as officials sought to minimize cuts in aid, stave off increases in unfunded mandates, avoid revenue takeaways, and secure greater flexibility in raising revenues. Of particular concern in 2008 were developments in the area of tax reform: in Florida , for example, voters approved Amendment 1, whose tax-relief measures are expected to cost local governments billions of dollars in lost revenue over the next five years. This article provides an overview of conditions and developments in the areas of local authority and finance; it also considers significant ballot measures, judicial decisions, and legislation.


 

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About the Author 

David R Berman
David R. Berman, Ph.D, is a Professor Emeritus of Political Science and Senior Research Fellow at the Morrison Institute for Public Policy,

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